Exit strategy

Onwards_and_upwards

My business partner and I have an investor lined up for our start-up business. Everything is going well, his only concerns are about my partner and I falling out - he believes partnerships always fail!

A friend of mine suggests we have an exit strategy in our business plan which focusses on what should happen if one of us wants to leave. He also thinks we should mention what would happen should one of us has a period of illness etc.

I just wondered if anyone had any tips, what kind of things should we mention and how on earth do we value now what the business might be worth 5/10/20 years down the line for one of us to buy the other out?!!

paddyrg

Onwards_and_upwards wrote: »

My business partner and I have an investor lined up for our start-up business. Everything is going well, his only concerns are about my partner and I falling out - he believes partnerships always fail!

A friend of mine suggests we have an exit strategy in our business plan which focusses on what should happen if one of us wants to leave. He also thinks we should mention what would happen should one of us has a period of illness etc.

I just wondered if anyone had any tips, what kind of things should we mention and how on earth do we value now what the business might be worth 5/10/20 years down the line for one of us to buy the other out?!!

How about the investor buys shares in a limited company you form to employ you? Then you can be very clear about who owns what, and extended sickness would be paid ssp as an employee. What percentage to hand over is a negotiation, of course.

Not all partnerships fail, but many many do, especially if they haven't planned for the very things you mention and more! With a Ltd company you can Ring fence liabilities, with a partnership you're both liable for the full company debts, even if your partner created them.

CKhalvashi

paddyrg wrote: »

Not all partnerships fail, but many many do, especially if they haven't planned for the very things you mention and more! With a Ltd company you can Ring fence liabilities, with a partnership you're both liable for the full company debts, even if your partner created them.

With a Ltd, it's also easier to sell as an exit strategy should it be necessary.

CK

Savvy_Sue

You have a very wise potential investor, and the time to think about these things is most definitely now rather than when you and your partner HAVE fallen out or one of you is ill and / or no longer pulling their weight.

If you don't go for a Ltd Co, then definitely get a proper legal partnership agreement drawn up. You will have to pay for this, but do NOT say you can't afford to: you cannot afford NOT to do this!

Onwards_and_upwards

Thank you everyone, we are definitely setting up as a limited company. The way he is investing is by building us a private nursery and then leasing it to us. We hadn't thought about offering him shares in addition to the lease, he should begin making profit on us in less than 5 years. There is definitely at least one other party interested in owning a private nursery in our location, so we really want him to feel confident in us, and although we have the experience, money, local knowledge etc, if he has concerns in our long-term business partnership then that is a concern to us!

Would 3 times the annual turnover or annual profit be a good benchmark for buying one another out?

Annisele

Onwards_and_upwards wrote: »

Would 3 times the annual turnover or annual profit be a good benchmark for buying one another out?

I'm not at all an expert on this, but I'd say not. Turnover and profit don't necessarily define the value of a business.

Imagine that you're turning over £2 million a year, your costs are £10 million, and your easily liquidated assets are worth £100 million.

Three times annual turnover is £6 million, and three times annual profit is minus £24 million - but the business might well be worth £100 million.

Onwards_and_upwards

Thank you for that, that is what we are really struggling with! We have no idea what to write for our 'buy out' terms.

antrobus

Annisele wrote: »

I'm not at all an expert on this, but I'd say not. Turnover and profit don't necessarily define the value of a business.

Imagine that you're turning over £2 million a year, your costs are £10 million, and your easily liquidated assets are worth £100 million.

Three times annual turnover is £6 million, and three times annual profit is minus £24 million - but the business might well be worth £100 million.

In the cited circumstances the business would be worth precisely nothing. If you had £10m of costs and only £2m of revenue, you'd close the business, and liquidate the assets. Hence there would be no business to value.

Pennywise

Onwards_and_upwards wrote: »

Would 3 times the annual turnover or annual profit be a good benchmark for buying one another out?

No, absolutely not - that kind of simple "valuation" is a very blunt tool. And as turnover and profit are such different figures, I can't see how you could glibly put them in the same sentence. Not only that, there's nothing considered for the value of fixed assets, goodwill, intangible assets, lease, or liabilities. Even worse, you're not defining turnover nor profit - can mean different things to different people.

You need to either take (and pay for) specialist advice or do a lot more research yourself as to business valuations for your kind of business. Look on the internet and you'll find lots of websites offering businesses for sale - you can quickly get a good idea of how much people are asking for similar businesses.

What is your exit strategy if you both want to sell - how much would you expect for it then? Either one of you will want the same share on early exit of one or other.

If you don't thrash this out between you now, you're in for major problems later on, not to mention huge professional fees in trying to sort it out between you (or even worse, your beneficiary if one of you dies). A lawyer's paradise!

Pennywise

Oh, and another thing - don't do the lazy way (as suggested by some solicitors) and put in your shareholder agreement that the price for buying the other out will be at "valuation provided by the company accountant". That's another total cop-out that opens the doors for not only the solicitors, but also for accountants to spend hours/days, charging thousands arguing over values.

If, between the two/three of you, you can't agree on exit strategy/value formula now, when it's worth nothing, you'll never agree in 5, 10, 20 years time when it has a value.

Whilst sitting down and thrashing it out, also make sure that you include your working expectations in the shareholder agreement, i.e. to cover you for if/when one of you starts to get lazy, works fewer hours, doesn't put the same effort it, etc - it causes massive resentment to the other who continues to put the effort in.

Yes, I sound jaundiced, but I've been dealing with small businesses for 30 years and seen VERY few happy endings out of successfull partnerships/limited companies set up between friends, siblings, etc. Things are usually fine, perversely, when the business struggles or fails because there's no money anyway, but when they're successes, the gripes come out of the woodwork and all hell breaks loose.

Onwards_and_upwards

Pennywise, that's fantastic advice - thank you very much.

Re using annual turnover/annual profit in the same sentence, it probably reads different from how I meant it. I was asking was it better to use 3 times annual turnover OR 3 times annual profit (though I now know neither is correct!!)