What is exit planning?

Exit planning is the process that business owners must undertake when preparing to ‘exit’. An exit can take many forms: it may involve selling all or part of the company, merging it with another business, passing it on to family members, or listing it on a stock exchange via an IPO (initial public offering).

Good exit strategies are an important part of a well-thought-out business plan for ambitious businesses. An exit plan can help achieve strong financial returns by increasing the value of your business, for instance by focusing on ‘maximising multiples’. An exit strategy may also incorporate succession planning to help ensure stability in the future ownership structure and direction of the business.

Above all, a business exit strategy should safeguard the interests of shareholders and staff, while laying the groundwork for a constructive relationship with potential new owners.

Why is business exit planning important for entrepreneurs?

Every entrepreneur has a different set of goals when building and exiting their business. One owner may desire a high-value exit that will allow them to finance other ventures; they may be happy to leave the business in other people’s hands while they pursue their next challenge. Another business owner may want to retain some level of managerial control post-exit; they may emphasise continuity and cultural alignment during the exit process.

Different considerations need to be made depending on the type of exit an owner wants. An exit strategy should take into account all likely legal, financial and operational contingencies to produce multiple plans of action based on the circumstances.

Some argue that an exit strategy should inform an entrepreneur’s thinking from day one. ‘Having an eye on the exit’ can help guide decision making when setting business goals for your company. It can help make the business more attractive to investors and ensure its long-term prospects are good.

Despite the benefits of an effective exit plan, accountancy firm Price Bailey found that only 24% of UK business leaders have an exit strategy in place. This indicates a big opportunity for SMEs to improve their long-term planning.

What if I’m not planning to exit my business yet?

Business owners with no immediate plans to exit may not realise the benefits of exit planning. There are a number of reasons why a formalised exit strategy is best business practice for companies at all stages of development:

• Risk management: There may come a time when a business owner needs to exit at short notice due to changes in personal or professional circumstances, so it’s better to have a contingency plan in place.
• Securing investment: Many venture capitalists will insist on seeing an exit strategy before committing to providing funding.
• Realising growth: Businesses with exit plans in place may expect their revenue to grow more quickly than those without one. Managing day-to-day operations and strategic decisions with an exit in mind can provide the focus and leanness required to maximise business growth.

Exit planning for business owners targeting maximum returns

To maximise returns, a business owner will focus on building value. The business valuation is usually based on some fundamental measure of performance, such as the company’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) and then adjusted for variables such as cash and net debt.

High earnings imply a high valuation, so business owners will often do all they can to increase their earnings. To get from earnings to an overall valuation, however, analysts will typically apply a multiple of some kind. For example, they may value the business at five times EBITDA.

The multiple of a business depends on a variety of things, such as the size and defensibility of market share, growth rate of the business, originality or uniqueness of a company’s products, and the multiples of other businesses in the same sector. In the run up to an exit, business owners will typically aim to maximise the multiple that can be applied at exit.

There may be disagreement about the correct multiple for a privately-owned business. Exit planning involves making a good case for a high multiple – one that is strong enough to persuade potential buyers.

Key steps in the exit planning process

What does an exit plan look like for successful businesses? Whether you’re just getting started as a founder or you’re looking to exit soon, effective exit planning should see you:

• Set out clear objectives and timelines, and establish your preferred exit route, taking into account the interests of all key stakeholders
• Critically assess your business plan and performance in line with these goals
• Carry out due diligence to benchmark yourself against (and get ahead of) your competitors
• Determine your valuation at the start of the process, and develop your business strategy with maximum value and sale price in mind
• Identify potential buyers that could be a good match to your business and ensure you meet any requirements they may have
• Ensure you have a robust succession plan in place so new business leaders are prepared for when you exit
• Get the timing right – consider market conditions, and don’t rush into a sale process before doing the work to get your financials and operations in order or running due diligence on prospective buyers
• Regularly review and adjust your exit strategy as business goals evolve or market conditions change
• Seek advice and support where you need it

Creating a business exit plan with your investor

From IPOs and management buy-outs (MBOs) to mergers and strategic acquisitions, there are plenty of routes to exiting your business. But creating a solid exit strategy can be a difficult undertaking, especially for small businesses that don’t have access to professional advisors.

At BGF, our priority as a minority investor is to work alongside businesses to help them achieve the successful exit they want. We only provide minority investment, meaning management teams stay in control of their business, while we offer guidance and support as a junior partner. Our experienced team have helped more than 170 investee businesses across the UK and Ireland to get the timing and valuation right on their exit. These include:

Kids Planet

With BGF as an investor, nursery chain Kids Planet expanded to more than 80 sites across the North West and Midlands. After an initial £10 million investment, BGF provided a further £30 million of follow-on funding, helping to increase the company’s EBITDA from £3.5 million to £15 million. In 2021, Kids Planet was acquired by Fremman Capital, a pan-European mid-market investment firm, delivering strong returns. BGF has reinvested as a minority shareholder and continues to back the business.

Coppergreen Leisure Resorts

Starting in 2016, BGF invested a total of £21 million into Sheffield-based holiday park business Coppergreen. This funding helped the business expand to four parks across Yorkshire, Scotland, Lincolnshire and Nottinghamshire. Coppergreen was acquired in early 2022 by Away Resorts, a private equity-backed holiday park business.

Sentric Music

BGF first backed music royalty service Sentric Music in 2017, with a total of £8.5 million to help the business expand globally, invest in technology, and finance acquisitions. BGF exited its investment in 2022 when Sentric Music completed a deal to merge with Swiss music fintech business Utopia Music.

If you’re interested in partnering with a minority investor that puts your interests first, contact our team today.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.