How to plan for a decent 5 year exit strategy?

[greystuff]

Hi,

I probably have one of those businesses that I'm just not going to be able to sell but I am of the age of looking towards the best possible exit strategy and would like to develop a 5 year plan. The business is a small limited company, turnover circa 120K last reported profit after all expenses including wages of circa £65k. I am the business, no employees, no debts, no overdraft, all assets (low value) paid for. The business is run very light but profit margins are good and client list is excellent in a small niche market in the Construction Industry. Projects run UK wide including a few in Europe and are generally large civil engineering or mid to large scale public works.

Having read around the challenges with selling a business and realising mine has no current saleable value (as it is me and small fry) I was wondering if anyone else has been in a similar situation and what route they took?

My current take on this is to possibly offer up an ever increasing shareholding whilst mine slowly reduces and work for the business for say 5 years to ever shrink the requirement it has on me by training, consulting and generally slowly handing over the reigns....I have come across the phrases hard equity and sweat equity but are unsure of what this entails.

What I am certain of is that I won't go down the route of a broker etc and I'll probably be doing the hard graft myself. Either that or the business just fades away over time.

Any previous experience of similar would be really useful.

Thank you very much.

 

[ctrlbrk]

Hi @greystuff

It sounds like you are looking for a gradual handover.

I find the increasing shareholding idea interesting.


It probably hinges mostly on you identifying the right candidate to take over your business, am I right?

 

[greystuff]

Hi @greystuff

It sounds like you are looking for a gradual handover.

I find the increasing shareholding idea interesting.


It probably hinges mostly on you identifying the right candidate to take over your business, am I right?

Hello @ctirbrk

Absolutely. I see no value in trying to push my business out there unless there is mutual interest and I devote the time and energy to creating an equally strong platform that the business currently enjoys.

There's really little or no competition to speak of so perhaps starting with a similar sector company but with an established workforce might be the way. For large-scale projects I have thus far managed and trained teams brought in by main contractors.

I also note that it is a bad idea to create a 'bolt on' business. Not 100% sure what this means but I hope the long lead in will avoid this if 'bolt on' means 'quick fix!'

Thanks for the advice.

 

[intheTRADE]

Do you have any competitors who you are friendly with/can approach with the increasing shareholding idea?

EDIT: Just read your post about about no competition

 

[Interestedobserver]

So wages before the 65k profit must be your wages only I assume?

How much wages do you pay yourself? Is it a realistic wage to replace you with someone else?

There doesnt seem to be much available wages wise based on your turnover and profit especially if the job requires working in Europe sometimes ?

I assume you also get use of a company vehicle before that profit of 65k?

 

[John Hemming]

Its difficult to judge on the information provided. It sounds like a reasonably well paid job that might suit someone to pay you possibly a small multiple of the income that is potentially made (like 1 to three times) on a deferred basis. However with more information it would be possible to come to a better conclusion.

 

[ctrlbrk]

Absolutely. I see no value in trying to push my business out there unless there is mutual interest and I devote the time and energy to creating an equally strong platform that the business currently enjoys.

In which case my suggestion would be to focus on your "talent acquisition" skills, i.e. refine the ability to shortlist the most promising candidates and mentor them as they transition into their new role taking over from you.

You may or may not be already skilled at this, depending on your people experience.

 

[greystuff]

In which case my suggestion would be to focus on your "talent acquisition" skills, i.e. refine the ability to shortlist the most promising candidates and mentor them as they transition into their new role taking over from you.

You may or may not be already skilled at this, depending on your people experience.

Talent Aquisition... I like that. Thank you. Yes I have plenty of experience in training and mentoring. However not with the view to aquire for my business as I have focussed on establishing a solid name in the marketplace so have not focussed on being a 'contractor'. Thank you for the feedback.

 

[SillyBill]

Any single manned entity is the blood, sweat and equity of the owner. And the relationships that owner has. You can grow the business to bring in staff who can take over from you. If it is a business with legs then this should be doable. If it isn't you are back to selling your job. And that is a low bid from anyone with any sanity owing to the first sentence.

 

[greystuff]

Any single manned entity is the blood, sweat and equity of the owner. And the relationships that owner has. You can grow the business to bring in staff who can take over from you. If it is a business with legs then this should be doable. If it isn't you are back to selling your job. And that is a low bid from anyone with any sanity owing to the first sentence.

Point taken which is why I identified this from the outset and is why I have afforded the 5 years. A quesrion: What constitutes a business with legs?

 

[Financial-Modeller]

You effectively have two choices:

1. Continue as you are, making as much cash as possible for 5 years. Close the company, give it to a colleague etc because, as you have identified whilst the business is totally dependent on you, it has no value without you.
2. Use the 5 years to create a business that is not totally dependent on you, such that it has value without you and can be sold in 5 years. This will require time, effort, investment, which means you will probably invoice for less, and take less out of the business in the intervening years.

Obviously you need to have a really good idea (using a robust business plan / forecast) of whether the net sale proceeds at the end will be greater than the foregone cost to achieve it. Remember that the headaches and aggravation could easily exceed the final valuation.

 

[Lucan Unlordly]

Out of interest, what would happen to your business today if you were taken ill, hospitalised or worse? I ask as much of what you say could be levelled at my business so during lockdown I started to write a disaster manual to explain why, for example, some customers were treated differently to others, who to turn to if an issue arose - basically a list of pathways and solutions for all the stuff I keep in my head.

I soon determined that my assumption the business could not run without me was nowhere near as set in stone as I believed.

 

[greystuff]

You effectively have two choices:

1. Continue as you are, making as much cash as possible for 5 years. Close the company, give it to a colleague etc because, as you have identified whilst the business is totally dependent on you, it has no value without you.
2. Use the 5 years to create a business that is not totally dependent on you, such that it has value without you and can be sold in 5 years. This will require time, effort, investment, which means you will probably invoice for less, and take less out of the business in the intervening years.

Obviously you need to have a really good idea (using a robust business plan / forecast) of whether the net sale proceeds at the end will be greater than the foregone cost to achieve it. Remember that the headaches and aggravation could easily exceed the final valuation.

Thank you for the clarity.

I think you are spot on. I did a feasability study to check the real cost of employees and it blew my current running costs out of the water. I used to run a couple of sub contractors a few years back but it was a headache so I decided to train operatives supplied by others. I have been doing this successfully for 5 years without giving up IP on what I do.

This is why my 5 year plan was to find an interested party who currently have their own team of operatives (long term people). Train them offering their company an ever uncreasing % share in my company and spend the 5 years developing a team of mini me's until such time that I released all ownership. My company is pretty well known in the niche services I supply so continuing the business name and methodology/advocacy is worth trying to keep hold of. I'm just not a contractor in the contractor sense of the word in the construction industry.

Your comments are very useful so thank you very much indeed.

 

[Annoying Donkey]

Train them offering their company an ever uncreasing % share in my company and spend the 5 years developing a team of mini me's until such time that I released all ownership.

Why not retain a portion of ownership and let other people earn you money...

 

[The Byre]

You have a job. At £65k it's a good job. Try selling that!

 

[greystuff]

Why not retain a portion of ownership and let other people earn you money...

Can you tell I've not much experience of this kind of stuff? Thanks!

 

[greystuff]

You have a job. At £65k it's a good job. Try selling that!

It's just that this figure is the retained profit after paying myself plus all other costs, corp tax etc. And the business has an ever expanding client list of large established companies plus Architects. So the brand is important too. I feel it's more than a job but obviously not a business with legs as remarked on in an earlier post. The arguments for it being worthless are valid I think but I've got to try to give it value without it getting swamped by becoming a contractor. Hmm... I appreciate the feedback.

 

[The Byre]

I'll tell you a story - tomorrow! Right now, I am about to have a bath!

 

[greystuff]

I'll tell you a story - tomorrow! Right now, I am about to have a bath!

Light a fire under it. Just don't use gas.

 

[Financial-Modeller]

Thank you for the clarity.

I think you are spot on. I did a feasability study to check the real cost of employees and it blew my current running costs out of the water. I used to run a couple of sub contractors a few years back but it was a headache so I decided to train operatives supplied by others. I have been doing this successfully for 5 years without giving up IP on what I do.

This is why my 5 year plan was to find an interested party who currently have their own team of operatives (long term people). Train them offering their company an ever uncreasing % share in my company and spend the 5 years developing a team of mini me's until such time that I released all ownership. My company is pretty well known in the niche services I supply so continuing the business name and methodology/advocacy is worth trying to keep hold of. I'm just not a contractor in the contractor sense of the word in the construction industry.

Your comments are very useful so thank you very much indeed.

You're very welcome.

You introduced IP to the discussion, which suggests that yours is not simply a 'money-for-your-time' type business.

I appreciate that you may not be able to divulge too much, but perhaps consider framing your overall objective along the lines of creating an income stream from your IP, rather than a sale of your business.

It is possible that you could license your IP to the interested party that you seek to identify, or a competitor and receive some kind of ongoing royalty payment or commission. It is also possible that the value of that could be greater than the value of the business.

 

[Construction Training]

hmmmmm very interesting post, I feel my business is similar to your own, where I am the business. We deal in the main in the construction industry, whilst not considering an exit strategy just yet (I'm only 43), people deal with the business because they want to deal with me.

My plan is to grow the business to a point where I can employ others to assist me (and make my life easier), this in turn would make the business more attractive and would provide me with more flexibility

 

[roydmoorian]

Exit strategy ? - Two bottles of single malt and lots of easy to swallow pills !!!

 

[The Byre]

Light a fire under it. Just don't use gas.

A day late but here goes -

I was you. This was the mid-to-late 90s. I had umpteen people working for me as freelance journalists in Germany supplying techy articles for UK and US trade magazines. All these people were specialists in tech and/or business subjects. My biggest customer approached me about buying the company and I consulted a friend who worked in the M&A dept. at IBM near Stuttgart.

"What's going on and how the F do I even go about this deal? I fear that they only want my knowhow and the contact details of my journalists and then they'll offer me a few thousand and I'm stuffed!"

I described my day - translating German texts into English, pointing them at juicy subjects, following up on details - it was 1001 tasks and I was clearly the bottleneck in the entire operation. I wanted to sell and I was fed up with the entire rat race and hectic lifestyle.

"You are what one calls in English a busy fool!" he said simply. "Tell these people that the company is not for sale, but don't worry! They'll be back! Get rid of your tasks one-by-one, starting with translating and work through everything, until you are out of a job."

We did it. One by one, the various tasks that I hated were put on the shoulders of the more promising candidates. At first, they did this for a percentage, but later, the teams were headed by pukka employees. We developed teams that worked without me overseeing every step. It took over a year, but the interesting thing was that the bottleneck (i.e. me!) was gone and I was earning more and not less!

The company got a new corporate structure, we had departments and processes. We invested in fax machines (remember them?) and created our own electronic bulletin board so that articles could be filed electronically. We even had a website with live video feeds from the likes of CNN and CNBC.

We were speaking the same language as our US customers and we were waaaay ahead of our UK customers who mostly didn't even understand what the Internet was or what the possibilities were that the Internet gave one. UK publishing houses were blind to what was going on and didn't see the future being handed to them on a silver platter!

They trusted in the future of print - which is why they are all struggling today. In the 90s they were flush with money and were launching one new title after another instead of investing in the future. The mice were having their cheese moved and they didn't realise it was happening!

I sold my erstwhile job as a going concern with about 150 people beavering away, writing deathless prose like "Sony looks to the future!" and "Another startling innovation from Texas Instruments!" in 1999 and at the grand old age of 50, I retired.

I started a lifestyle business in the UK and invested in a steady business in Germany that did not require much input from me. I'm still bouncing off the walls with funky ideas while the mice in my industry are wondering why the cheese store is getting smaller and moving further away.

P.S. If you keep mice, don't feed them cheese - it's not good for them! It makes them fat and lazy and gives them bloat.

 

[Clinton]

@greystuff , make your business sellable ...or close it down when you're done making your money.

This is why my 5 year plan was to find an interested party who currently have their own team of operatives (long term people). Train them offering their company an ever uncreasing % share in my company and spend the 5 years developing a team of mini me's until such time that I released all ownership.

That's a non-starter. Nobody in their right mind would buy a business in installments like that.

The contract for the sale of a business - the Share Purchase Agreement - tends to be 60-100 pages long and costs anywhere from £10K to £30K (each!). It's a very complicated contract, and that's for a simple sale of 100% of the shares. What you're suggesting makes it 10x more complicated.

And if you stop and think about it, you'll recognise why. As ownership percentages change, voting rights changes, control of the company changes. Detailed provisions would need to be included to prevent all manner of bad blood actions by both buyer and seller at different levels of ownership, and to provide both parties with adequate protection. Clauses would need to be inserted to resolve conflicts and agree withdrawal options if either party feels the arrangement is not working for them. And how on earth are you going to draw up the reps, warranties and indemnities that are standard in SPAs?! Frankly, I can't see any transaction solicitor even taking it on!

What you're desperately trying to do is find some way to sell an unsellable business.

There isn't one.