An overview of the exit process

Why exit your business?

The motivation to exit can be driven by either the personal objectives of the owner or the long-term strategic objectives of the business. The most common reasons are the following:

• The owner would like a lifestyle change e.g. retirement
• The owner's interests have changed and they would like to focus on new areas
• The business is growing rapidly and the owner or founder recognises that new skills are required to support the next stage of growth

When is the best time to exit a business?

There is no perfect time to exit, but they most commonly occur during the growth and maturity stages of a business, when it attracts the highest valuation. Changes in the macro and micro economic environment can also influence the timing of an exit due to their impact on valuation. These are owner-biased motivations for timing an exit process, but on the other end of the spectrum, interested third parties may approach the business during its early stages, decline, or a weak economic environment to minimise valuation.

Early-stage businesses may find it challenging to exit as they are either too small to generate significant interest or do not have the formal processes in place needed for a smooth due diligence process.

What is the typical timeline for an exit?

The typical timeline for a full exit can range from 6 – 9 months and can be split into two key stages. The first stage involves the preparation of a marketing document, often referred to as an Information Memorandum (IM), which provides insights into key areas of the business to generate interest. Working with an advisor during this stage can help you to extract, review and order key information into a captivating story that will help maximise interest.

During the second half of the process, the business will typically enter into exclusivity with a prospective buyer, who will then carry out checks to confirm all relevant information. This process is known as due diligence and provides the prospective buyer with a realistic picture of how the business is performing and how it is likely to perform in the future. Due diligence normally covers financial, legal and tax areas but can focus on more specific areas such as IT, commercial or HR depending on the business. The due diligence process normally occurs concurrently with negotiations on the price and terms of the exit, guiding the creation of a share purchase agreement.

The timelines for exits vary significantly, as there are many unknowns in the process, which cannot be predicted. A potential buyer could withdraw from the process during the final stages of negotiations, or a superior offer could be received during due diligence from another prospective buyer. The experience of a corporate finance advisor during these moments is invaluable and will help provide the clarity needed to make the best decisions.

What happens after an exit

Depending on which exit path is chosen, the owners of a business may be completely removed from the day-to-day running of the business or could continue to be involved as an employee or consultant. 

If the owners of the business are seen as key to its day-to-day running, typical during early and growth stages, it is more likely that a trade or private equity buyer would insist that the owner remains in the business for a transitionary period. To align interests in this situation, a deal is usually structured with an earn-out, which is an additional amount that is paid upon meeting certain conditions e.g., remaining as an employee for three years or hitting financial performance targets. Owners who were heavily involved in key decisions may find the earn-out/transitionary period challenging as they will not have the same level of control as before. 

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