When a business owner plans an exit, the motivations broadly fit into three categories: business motivations, personal motivations and financial motivations.
Business motivations can include industry changes, stagnation under the existing ownership or a lack of internal succession options.
Personal reasons might include family changes, a desire for a new challenge or retirement, as well as health issues or burnout.
Financial motivations, meanwhile, can include a desire to unlock wealth that is tied into the business, a lack of growth capital or market conditions that make a sale highly attractive.
On a more emotional level, motivations can also be split into “push” factors – those that make it less appealing to continue as owner – and “pull” factors – those that entice owners to step away.
Often, it can be impossible to predict when these factors are going to come into play. You may well be planning to retire and exit when you get to 65, but you can’t predict when your health might change. Or when you might receive interest in acquiring your business from a strategic buyer prepared to pay a premium.
In many cases, exits can be unplanned or forced – factors such as partnership disputes, legal issues or unexpected personal changes can necessitate an exit at a random point.
Fundamentally, the unexpected nature of many business exits highlights the importance of having an exit strategy baked into a business plan as early as possible, in order to secure a strong valuation and smooth the way for a successful transition.
Clearly, a lack of an exit plan leaves owners at risk of the opposite: a sloppy, difficult exit process and a low valuation. However, even if an owner has planned for their exit, they may not have fully thought about what comes next and, in some ways, that can be just as damaging as a poorly planned exit.
Indeed, in a recent Arbuthnot Latham survey, just 17 per cent of UK entrepreneurs polled who had recently exited or were in the process said that they felt completely prepared for life afterwards. This finding is in line with research conducted by the Exit Planning Institute in the US that found 75% of business owners profoundly regretted selling their business within one year after selling – not because they didn’t get the deal they wanted, but because they neglected to design a post-ownership life plan.
In order to make your sale personally fulfilling, as well as financially successful, you need to understand the reasons that might influence your decision and consider what comes next.
We recommend that owners examine the numerous motivations that can drive a business exit. As well as highlighting the importance of a strong exit strategy and pre-sale preparation, looking at exit motivations can perhaps help owners to visualise when and why they might seek to sell and, potentially, what might come next.
Of course, it is important to remember that – while there are several common motivations that can prompt an owner to sell up – it is more likely to be a combination of a number of these factors over a period of time that ultimately lead to the decision to sell.
Personal motivations
Retirement
Personal reasons are among the most common motivations for owners seeking to exit. A change in one’s personal life or a desire to shift the work-life balance, can cause busy owners to think seriously about their role as a leader and whether it is conducive to the kind of life they want.
Often, the passage of time will be what causes an owner to consider an exit. For many owners, when they start or acquire their business, they will see the endpoint as being when they choose to retire. It doesn’t always work out like that, of course, but for an owner who reaches a certain age while still at the helm, thoughts of retirement will naturally factor into their planning for the future.
A strong line of succession and a well-planned exit strategy can help to facilitate a smooth retirement for owners. While many owners continue working well past retirement age due to enjoying their work or wishing to maximise their retirement savings, a lack of succession options or a business that is not sale-ready may result in an owner working past the age that they had envisioned.
Health, wellbeing and family
Even if owners aren’t considering retirement, regular life can contribute to thoughts of an exit, or even force an owner to sell. Health issues, whether personal or related to a close family member, can immediately force an owner to shift their focus to treatment, recovery or caregiving.
Should health issues not immediately necessitate an exit, they can still put things into perspective and make owners reconsider their priorities, potentially leading them to place a greater emphasis on their personal life.
Similarly, family matters can make owners question whether they wish to continue at the helm. Having children, moving house or other family changes can all be pivotal in an owner deciding to exit.
In a recent Arbuthnot Latham report polling owners who had either exited a business or were in the process of doing so, 44 per cent of respondents cited family needs and personal wellbeing as key motivating factors. Respondents mentioned a range of considerations, including health concerns, a desire to spend more time with loved ones and the long hours involved in business ownership as contributing to their decision.
Health, wellbeing and family
Even if owners aren’t considering retirement, regular life can contribute to thoughts of an exit, or even force an owner to sell. Health issues, whether personal or related to a close family member, can immediately force an owner to shift their focus to treatment, recovery or caregiving.
Should health issues not immediately necessitate an exit, they can still put things into perspective and make owners reconsider their priorities, potentially leading them to place a greater emphasis on their personal life.
Similarly, family matters can make owners question whether they wish to continue at the helm. Having children, moving house or other family changes can all be pivotal in an owner deciding to exit.
In a recent Arbuthnot Latham report polling owners who had either exited a business or were in the process of doing so, 44 per cent of respondents cited family needs and personal wellbeing as key motivating factors. Respondents mentioned a range of considerations, including health concerns, a desire to spend more time with loved ones and the long hours involved in business ownership as contributing to their decision.
Burnout and fatigue
Owning a business can be tremendously rewarding – personally, professionally and financially. The flipside of this is that it can also be extremely stressful and challenging in all these ways.
Owners will often have a significant degree of their personal wealth tied up in their business, meaning that they face considerable personal losses if the business is not performing well.
In the UK, this will have become a very acute concern for millions of small business owners who have faced an extremely challenging business environment over recent years in the face of Brexit, COVID-19 and last year’s recession.
As a result of the major pressures that businesses and their owners have come under, burnout is expected to become a growing factor in owner exits as the UK emerges from the crises and owners have time to reflect.
In a recent interview with Levenfeld Pearlstein, Peakstone Group Managing Director Robert Meyer said that his bank was seeing an increase in owners seeking to exit due to the toll of recent years – drawing a direct parallel between the experiences of owners during the COVID-19 pandemic and of owners during the 2008-09 recession.
Meyer comments: “After COVID, people realised that to own and operate a business, they effectively had a large portion of their overall family’s net worth tied to an operating business. There’s a significant risk there and as a business owner, you think that you’re in full control and it’s only going to go one direction, both from an operating and value performance perspective, but then you go through something like COVID and you realize there’s risk. So, you come out the other side of it, you try to get back to where you were, and then decide now is the right time to sell.”
It is important to mention that burnout and fatigue are not exclusively the result of steering a business through traumatic events such as a global pandemic or financial crash – often owners simply become overworked by managing the day-to-day operations of a business.
This is something for owners of all types to bear in mind. If you are overworked, you are more likely to become fatigued and experience burnout. By the same token, if you are overworked you are likely too important to your business’ operations.
This can create a double-edged sword scenario, in which an owner wishes to exit because they are overworked and burnt out but are unable to because their over-importance to their business means that it is an unattractive asset.
If an owner feels fatigued and overworked and recognises that their business essentially cannot operate without them, then that is the time to begin taking steps to decentralise themselves from day-to-day operations – even if they are not yet considering retirement.
Goals achieved, desire for a new challenge
A desire for a career change is a common experience for many people and business owners are no different. While the common perception may be that businesses are often personal projects of their uber-passionate owners, this isn’t always the case. Even if it is, even the most dedicated owner is not immune from beginning to pine for a change.
This is perhaps particularly common among entrepreneurs, who may thrive on starting new businesses, getting new ideas out into the marketplace and building a company from a small startup to an established name – but are not so keen on what follows.
Once the business is established, matures and experiences slower growth, dynamic, challenge-seeking entrepreneurs may begin to lose their zest for operating the enterprise. A feeling that they have achieved their goals or simply that the exciting early phase is over may lead to a desire for new ventures.
In the Arbuthnot Latham report, achievement of goals and a desire for a new challenge were the most frequently cited triggers for exiting a business – with each mentioned by 24 per cent of respondents. 8 per cent, meanwhile, stated they had fallen out of love with their business.
As with burnout, this may become a more common factor as we move on from the worst of the COVID-19 pandemic and owners are able to take stock and refocus on what they actually wish to do professionally. For many, they will realise that this may not involve being the owner of their current company.
Financial Reasons
Personal finances
A business usually represents the majority of its owner’s personal wealth as it is likely to be the largest, most valuable asset they own. This is a situation that provides both financial opportunity and risk – and, for both of these reasons, an owner may decide to exit.
On the one hand, selling a business that has been built into a valuable, attractive enterprise can enable the owner to cash out and significantly increase and diversify their wealth, providing them a pot with which to fund anything from a new venture to retirement.
Conversely, an owner may also exit to reduce their personal financial exposure. If, for example, the business is facing significant headwinds, then an owner may decide that selling up is the best option in order to avoid a major financial loss should the company enter insolvency.
Debt and financial pressure
Similarly, an owner may simply decide to sell due to overwhelming financial pressures and a debt burden that is putting the company’s future at serious risk. This is a particularly pressing concern for many in the wake of the COVID-19 pandemic and years of tough trading conditions, with hundreds of thousands of UK businesses having amassed huge (in many cases unmanageable) debt piles during the pandemic.
As well as unexpected economic shocks like COVID-19, businesses can also fall into financial straits due to industry changes, growing competitive pressure or simple poor financial management.
A business with major debts is typically not going to attract a premium valuation if brought to market – with an incoming owner putting themselves in the position of having to return the business to profitability and a strong financial position – but the owner may decide it is worth taking the hit to avoid insolvency.
Unlock growth capital
The pandemic hasn’t just affected businesses by plunging them into debt. For many, they will have survived the past few years with relative financial resilience but are now faced with a situation in which growth is a difficult challenge.
With the UK economy just treading water, growing concern around global geopolitical issues and persistently low consumer sentiment, achieving sustainable organic growth is extremely difficult for many business owners, leaving many firms at risk of not achieving their potential. If companies are able to secure commercial loans at all, lending rates are still up at between 7-12 per cent.
In such a situation, while the owner may not wish to depart, a sale to a well-capitalised owner could provide the financial firepower to enable the business to invest in growth – e.g. through new technology or even M&A deals.
A sale to a private equity firm could prove particularly valuable in securing transformative investment, while potentially enabling the owner to continue, and achieving a second or even third exit down the line. There are significant drawbacks, however, with the owner likely to cede significant control over strategic direction, the potential for disruption to the workforce and ethos and the fact that there will be another sale process once the PE firm has completed its investment.
Market timing
Well-prepared business owners will have an exit strategy in place from their early days at a company. For some, they will even have achieved the position where the business is “always saleable” – meaning, essentially, that it is scaled up, high value, owner-decentralised and an attractive proposition to the preferred kind of buyer.
This can all be done without the owner necessarily putting a timeframe on their own exit or even planning to exit at all for the foreseeable future. Rather, this provides the enviable position where they can remain in charge, while waiting for the right market conditions to occur.
There is a significant risk here of course. The right conditions might not emerge and, indeed, a totally unexpected event could have a devastating impact (very few owners would have foreseen something as tumultuous as COVID-19).
However, in some cases, an owner may decide to sell because they and their business are ready and the market conditions are right. The right conditions will naturally vary from sector to sector. But, broadly speaking, if the business is performing strongly, it is ‘exit-ready’, the overall sector is solid and analogous businesses are being sold for high multiples, then a well-prepared owner is unlikely to find a better, more profitable time to sell.
Taxation
A rising tax burden is among the key concerns facing business owners across numerous sectors and, for many, it is becoming a major factor in considering an exit.
There have been recent increases in corporation tax and capital gains tax, while the next year is set to see increases in Employers’ National Insurance Contributions and the rate of CGT charged on business asset disposal relief.
The higher tax burden, which, when combined with rising costs elsewhere, is driving many to consider job cuts, price increases and, in some cases, an exit. In the Arbuthnot Latham report, 65 per cent said that the influence of tax increases had encouraged them to exit sooner than they would have wished to.
Business Motivations
An offer you can’t refuse
Sometimes, deciding to sell is as simple as being presented with a great offer. An owner may not even have been working towards an exit, but may have attracted interest simply through strong growth, rising profitability or positive industry trends.
A great deal – whether coming from a private equity firm, competitor or other strategic acquirer – can cause any owner to pause for thought. Indeed, an irresistible offer is a commonly cited exit motivation, with 19 per cent of Arbuthnot Latham respondents naming it as a factor in their exit.
However, while an offer may be incredibly attractive on paper, this scenario may prompt greater reflection than other factors. For one, an owner presented with an unexpected offer may not be emotionally ready to leave or have any idea what they would like to do post-sale, potentially leading to feelings of regret or a lack of purpose post-sale.
Or, if the business has attracted interest through its strong performance and/or growth, the owner may consider whether they could attract an even higher offer in future, either by continuing on their current trajectory or trying to ramp up their growth ahead of a proper marketing process. An offer may seem attractive at first, but may not accurately represent the potential value that could be attained through a full preparation process.
It is also important to note that an offer that is hard to turn down may not come at a time when a business is experiencing exponential growth and the offer itself may not even be that high. If the business is struggling or the owner has run out of energy, then even a low bid that offers a solvent escape route and something of a payday may be tempting.
With many owners still likely to be suffering with feelings of burnout post-COVID-19 compounded by frustration with trying to achieve subsequent organic growth, we will continue to see numerous businesses being suddenly put up for sale and then snapped up for modest valuations by opportunistic buyers.
Lack of succession options
Some business owners may begin considering their exit before realising that succession options are limited, with younger generations or existing management either unwilling or incapable of taking up ownership.
According to Peakstone Group’s Robert Meyer, a lack of faith in younger generations – or a lack of interest on their behalf – is emerging as a common theme in business owners deciding to sell.
Meyer stated that “more times than you would think – [owners] do have family members in the business and, interestingly, they just don’t feel like those family members are interested and/or equipped to operate a business. So rather than handing it over to somebody who might put the value at risk, they sell the business, monetise the value, and transfer the wealth or value in a way other than giving them the company.”
In this case, a sale to a third-party may be the best option for preserving the business and ensuring that it does not drift into insolvency or liquidation once the owner departs.
However, owners should be aware that a business with weak upper management, a lack of leadership capabilities, or succession issues is unlikely to attract a high valuation from potential buyers. Depth of management is too often paid scant attention by prospective sellers.
If an owner is still relatively young and has the energy to continue leading the business for a further three to five years, then the focus should be on building a strong management team with a wide base of knowledge and leadership skills. This will lead to significantly greater exit options, whether in the form of an internal succession to a trusted team, or a higher value third-party sale.
Industry changes and disruption
One of the most common themes in sales of small companies to bigger counterparts is the rapid pace of change and disruption within their sector. In accountancy, for example, increasing regulations and the growing role of technology have resulted in many smaller firms selling up to consolidators to ease their back-office burdens and secure investment while continuing to serve their longstanding client bases.
As industries change, the role of technology accelerates and regulations shift, it can be difficult for small companies to keep up – whether due to a lack of resources or a lack of capital to invest in the business.
Selling to a bigger, wealthier rival or attracting funding from an investor can enable companies to either invest in their own growth, expand into new markets or pass on some of their administrative functions to a more well-equipped owner, allowing them to focus on their core business.
Stagnation
An owner may decide to sell because they feel that they simply no longer have the vision, application or energy required to take the business forwards. This may not be a dramatic discovery – the business may not be being left behind by a rapidly-changing industry and the owner may not be experiencing burnout – but there can come a point where they feel they do not wish to continue or that doing so is not in the firm’s best interest.
If a business is performing solidly, but has plateaued and is not growing, the owner may feel that their leadership has stagnated and that the best route to return to growth is under new leadership.
While it may take considerable reflection and serious self-awareness for an owner to see that their exit would be best for the company, it is not an uncommon factor in exits. In the Arbuthnot Latham report, 16 per cent stated that seeing that the business required additional expertise to drive growth had influenced their decision, while 14 per cent said that they had seen that the business required a “reset”.
Partnership disputes
Business partners sometimes fall out – it’s simply a fact of life. While disputes between co-owners are common even at thriving business (indeed, competing viewpoints can be key to driving growth), sometimes they are so serious that it forces an exit.
Disagreements can occur for any number of reasons, whether financial, strategic or more complex, and can lead to problems that put the business itself in jeopardy. If, for example, a dispute between partners ultimately resulted in legal action then the business’ capacity to continue operating in its existing form would be seriously impaired.
There can also be an intensely personal side to disputes between partners, for example if they are friends who have suffered a falling out or a married couple going through a divorce. While these factors may not have direct bearing on the business, they can make it extremely difficult for co-owners to continue working together.
In many cases, the best path forward is for one partner to exit the business—a step that, ironically, can become a major source of conflict in itself. Such a solution could potentially help salvage the business or even a personal relationship. Sometimes, an owner may even be forced to exit as a result of a legal settlement.
Successfully navigating these situations requires more than just a financial or legal strategy – it demands an approach that accounts for the emotional and relational complexities involved. Engaging an experienced exit planning professional can help structure a fair and efficient resolution, ensuring that both business and personal considerations are properly managed. A skilled advisor not only facilitates negotiations but can also bring in specialists, such as mediators or business psychologists, to help manage the human dynamics of the transition. This holistic approach increases the likelihood of a smoother exit while protecting both the business and the personal well-being of those involved.
Legal and regulatory issues
Lawsuits can lead to settlements that force an owner to sell – either as part of the settlement or due to a sale being the only financially viable way for the business to continue. Personal legal issues can also mean that owners may seek to cash in on their business to settle costs or simply gain a cash injection following a costly process.
If a business or owner contravenes regulations governing their industry, then compliance issues can also become a motivating factor in a sale. Or, as mentioned above, an influx of new regulations may simply mean that ownership is too burdensome.
In extreme cases (for example fraud or major tax evasion), an owner may even be banned from being a company director for a period – immediately forcing their exit from any business at which they serve as a director.
Final thoughts
At some point, every owner will exit their business – the question is how prepared they are for the process and what follows and in what manner they exit. Many will visualise their exit purely in financial terms – but emotional readiness and a plan for what comes next are as important.
Fundamentally, every owner will have their ideal exit in mind – typically a smooth process that rewards them financially for their hard work and enables them to move on to new ventures or a new chapter in life.
However, business is a fickle world and an ideal exit may not be reality. For that reason, even young owners who are full of energy and enthusiasm for their business should think carefully about their exit strategy, how they can prepare themselves and their business for the parting of ways and, finally, what they will do post-exit.
This could be the difference between a clean exit that sets the stage for the next chapter, or a messy separation that is both financially and personally disappointing.
Have a no-obligation chat to one of our Certified Business Exit Planners (CEPA) if you would like an independent appraisal of your situation. You may be wondering if it is the right time to put your business up for sale, or how to get yourself ‘exit-ready’ to be able to take advantage of divestment opportunity down the track.
