BGF explains: How to create your business exit strategy

A thorough and flexible exit strategy can help maximise the value of a company, allowing business owners to cash out when the time is right. Read on to learn more about exit strategies and why they’re so important, as we explore some of the key points to consider when creating an exit plan for your business.

What is an exit strategy?

When a founder or business owner ‘exits’ their company, they will sell all or some of their shares in the business, so that they no longer hold a majority stake. This may look as simple as transferring ownership to a family member or it could involve a more significant change in ownership, for instance selling your business to a competitor or larger company.

An exit strategy helps business owners to successfully exit their company—for example, through an initial public offering (IPO), strategic acquisition by new owners, or other form of equity sale. However, it’s not uncommon for this crucial business planning process to be overlooked.

Why is it important to have an exit strategy?

Research suggests that 48% of entrepreneurs wanting to exit their business in the future have no exit strategy in place. While it’s true that many factors involved in the exit process will be outside of your control, that’s all the more reason to prepare with a well-thought-out exit strategy from day one.

An important part of business contingency planning, exit strategies can:

• Provide valuable direction for business owners when setting growth goals and objectives
• Inform your recruitment and succession planning process
• Attract investors, particularly those focused on exits, such as angel investors and venture capitalists

• Guide decision making to increase your company’s valuation, for maximum returns at exit

Types of exit strategies

Perhaps the most crucial aspect of your business exit strategy is choosing the right method of exit. There are numerous ways to sell a majority stake in a business, from management buyouts (MBOs) to mergers and acquisitions (M&A), and there’s no one-size-fits-all template for you to follow. The best exit strategy for your business will depend on your size, industry and exit goals, among other factors.

These are some of the most common exit strategies for growing businesses:

• Initial public offering

  The process of offering shares to the public for the first time, also known as ‘going public’. Following an IPO, a company’s shares will be listed on a stock exchange, where they can then be traded. Many ambitious businesses aim to IPO one day, but this exit strategy requires considerable preparation; a business must ensure there’s sufficient demand for its shares in order to IPO successfully.

• Trade sale

  Where a business is sold, either wholly or in part, to another company (typically one that operates in the same market sector). The due diligence required for a trade sale, though rigorous, is typically far less complex than for an IPO. After a trade sale, a business owner may choose to leave the company or stay closely involved, depending on the terms of the deal.

• Acquisition by private equity

  Where a business is wholly or partly sold to a private equity firm. Depending on the terms of the acquisition, the private equity firm may make structural changes to the business post-deal to increase its profitability, though some firms won’t. Private equity firms typically invest with the ambition to generate a significant return on their investment within a few years.

Key considerations when developing your business exit strategy 

As well as deciding between different business exit strategies for your business, there are a number of other factors that you should consider:

1. Determine your exit goals as early as possible

The first step of any exit strategy is to establish a set of goals for the exit. Business owners should ask themselves:

• Do I want to retain a share of the business?
• What should the ownership and management structure look like?
• Do I want to have a decision-making role after exit?
• Do I want the business to continue operating in the same way?

• What is the optimum company valuation at the time of exit?

According to Fiona Lowry, founder of former BGF portfolio business Good Care Group (sold to Sodexo UK in 2019), the most successful entrepreneurs consider these questions in the early stages of building a new business.

“Ideally, you should make your exit part of your strategic thinking from the beginning,” she told delegates at BGF’s 2021 Portfolio Day. “But you should also be flexible and willing to change your plan based on how you are perceived by the market.”

Early exit planning is important because of the amount of groundwork that needs to be completed in the run-up to an exit. Having a formalised strategy, with contingency plans in place, can make the process run more smoothly and means you’re prepared to move when the time is right (whether that’s driven by personal circumstances or market conditions).

Long-term business exit planning may also help your business in raising capital. Some investors, such as venture capital funds, will insist on seeing one before they invest, to ensure there’s potential for a high return on investment (ROI) at exit.

2. Establish the valuation of your business

Determining the value of your business is an important step in any exit strategy. The potential sale value of a business takes into account available assets, resources, capital and liabilities. It’s also affected by factors such as profitability, market sector, balance sheet ratios, stability of contracts, the company’s reliance on suppliers and the loyalty of its customers.

Usually, exit strategies will focus on increasing your company’s valuation to maximise returns. Prioritising net income in the period leading up to a planned exit is one way of doing this, so having a strategy in place to scale back expenditure could be key. Potential buyers may also try to find vulnerabilities that will allow them to chip away at the purchase price. An exit strategy should focus on finding and addressing these weaknesses in advance.

Business valuations are often carried out with the help of financial advisers, who bring in outside perspective and expertise.

3. Generate interest as part of your exit strategy

Whatever type of exit you choose, your exit strategy should include a plan for generating interest in the business. This should involve raising the company’s profile and making potential buyers aware that an exit is planned, says Fiona Lowry.

“You can increase your profile in the market using things like conferences and awards. Start engaging in active conversations when you’re about a year off. You need to understand what’s in it for a potential investor, and why a deal would make sense for them.”

Generating interest from stakeholders in advance of a planned exit can help increase the sale price of the business, especially if there’s competitive tension in the market.

How BGF can help you develop a successful exit strategy

BGF’s team of local experts across the UK and Ireland have a huge amount of expertise in creating and executing exit strategies, for both small businesses and established firms.

Unlike some investors, we don’t impose inflexible exit deadlines on the businesses we back. Instead, we work alongside management teams to determine the most suitable timeline. BGF’s unique funding model means we aren’t under pressure to produce returns according to an arbitrary cycle or schedule. Our mission is to support business owners in exiting at the time that’s best for them.

Some of the exits achieved by BGF portfolio companies to date include:

Uform

Based in Northern Ireland, Uform is a manufacturer of kitchen components, which grew 40% YoY during BGF’s investment period. In 2022, the business completed a successful exit, when it was acquired by Irish private equity fund Cardinal Ireland Partners. Following the deal, BGF reinvested in Uform and remains a minority shareholder. Eamon Donnelly, co-founder of Uform (below, left), shares his story of growth here.

The Coaching Inn Group

This chain of pub hotels tripled its network thanks to BGF’s funding and value creation support. In 2021, The Coaching Inn Group was acquired by RedCat Pub Company, an investment vehicle that provides funding to the UK pub sector. Kevin Charity, founder and CEO (below, left), said BGF’s role in the exit was invaluable, describing our approach as “respectful not pushy”.

HeleCloud

HeleCloud used BGF funding to finance a series of acquisitions. In 2021, the cloud computing services provider completed a successful exit by trade sale, when Swiss multinational SoftwareONE acquired the business. HeleCloud founder Dob Todorov (below) says BGF allowed him to achieve in four years what would otherwise have taken 15 years to do.

To find out more about BGF’s unique patient capital approach, 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.