Growing your business for a successful exit

The Fundamentals

Introduction

Most entrepreneurs share a common dream of devising an innovative business idea, growing that business and building something of value, then exiting the business via a successful sale. Unsurprisingly, that dream is more difficult to achieve in practice and if you aspire to exiting your business by selling it, you need to develop an exit strategy as soon as possible.

A coherent exit plan will help you to build and structure your business correctly, making it more likely you will be able to sell your business when the opportunity arises,  enabling you to successfully exit in the process.

Considerations such as company culture, systems and controls, along with growth strategy all play an integral part in the sale of your business further on down the road. Therefore, the best thing you can do to help facilitate a successful sale, is to start early with a clear plan on what your exit strategy will look like. Thought should be given to exit planning years before any business is put on the market and ideally should begin as soon in the business development cycle as possible.

Good exit planning includes focusing on the fundamentals of the business and ensuring the business is built upon strong foundations. This includes scalable strategies and systems that grow alongside the business.

Business sales often fall through because significant issues arise during the due diligence process. We believe that rather than retrofitting solutions to deal with problems at the point of sale, implementing coherent strategic planning and the formulation of systems from the outset builds a culture of success and also encourages regulatory compliance. Not only are these both essential components to  satisfy any due diligence process but they also help prevent unforeseen issues arising further on down the line which can de-rail negotiations and cause the loss of a sale.  

The challenges around implementing fundamentals

Starting a company or new venture is complicated. Every entrepreneur experiences highs and lows when launching a new business, even if they follow a thorough, well-structured plan. When you start a company, typically your focus will be on getting the immediate things done for your new business. Although this can provide some initial success it can often mean that long term planning is put to one side and fundamentals can be overlooked.

It is important to not get lost or distracted on the immediate needs of the business to the exclusion of all else. Being able to step back and make sense of the big picture is a priceless asset that will help you achieve long term success and perhaps your ultimate goal of a successful sale.

Most start-ups spend their initial profits in reinvesting, and your company should be no exception. The key to reinvesting is to have a sound strategy, not to necessarily devote a certain percentage of your profits to unplanned, or random,  expenditure. Your reinvestment efforts should be in line with your current strategic plan for growth.

So after you’ve had that initial success what should you do with those initial profits and which fundamentals should you focus on? We believe that the fundamentals below are essential components of any well thought out growth strategy.

1. Investment

For start-ups and growing companies, raising money is integral to “kick starting” a business and also achieving sustainable growth. In the UK SEIS and EIS are extremely powerful tools for entrepreneurs and growing businesses to attract investment; as well as being important for investors. Firstly, they make it far easier for a company to attract investment and secondly, they enable those investments to raise more money.

Investors will not only be interested in the basic concept of the company but also so its structure. The security of that business’s assets and key employees are vital to the long term viability of any business and a key consideration for any sophisticated investor.

2. Shareholding structure of the company & shareholder governance. 

It is important to give thought to the long term financial needs of the company and not focus solely on the short term. The shareholding of the company and the relationship between existing shareholders is important.

Ensure that your share capital, articles of association and any shareholders agreement provide you with the flexibility you need to be able to attract multiple rounds of investment.

Problems can often arise when relationships sour and disputes arise between shareholders with no agreed mechanism of resolution. This is something that is common in  start-up companies, where there is typically a large amount of optimism and excitement around the creation of a new venture but that is often tempered by a shortage of working capital. Consequently, when founders seek to attract staff they often gift equity to those new joiners in order to make their remuneration package more attractive. During this optimistic period, people within the company tend to get on well and little thought is given to what will happen if things do not go according to plan. In particular, the procedures that are to be followed in the event of disputes arising and the rights of shareholder leavers upon termination of employment are things that are typically overlooked.

For this reason start-ups often  simply use the model company articles of association that are the standard default articles a company can use upon incorporation and perhaps most importantly they often fail to have in place an appropriate shareholders’ agreement. This situation tends to arise because the Model Articles of association create a false sense of security. It’s important to bear in mind that the Model Articles of association do have significant limitations. For example they contain no restrictive covenants and they provide limited restrictions on the transfer of shares which, as a business owner, is something you might be anxious to avoid.

The solution is relatively straightforward and that is to have a proper framework in place for avoiding shareholder disputes. This requires investment in bespoke corporate documents that specifically cater for situations when shareholders leave and provide appropriate mechanisms to govern disputes between shareholders. This documentation does not have to be overly complicated but it does have to integrate with the overall commercial strategy of the company and be in place prior to the shareholder exiting the company.

3. Protect key assets and Intellectual Property

Other areas that are often overlooked are the assets and intellectual property of the company.  For many businesses, intellectual property protects more than just an idea but rather genuine business assets that may be integral to the core services of the business and its long-term viability. 

If you are a small business, it’s important to protect any unique products or services that you own as competitors can use your success to take away market share, resulting in slow growth and loss of revenue. Losing that hard earned momentum and market share early on in a business’s development can be devastating. It can also be extremely expensive and time consuming to try and prevent any infringing party without the appropriate legal protections in place.

Intellectual property can including a variety of things such as logos and corporate identity through to products, services and processes that are unique to the business. The onus will be on you as a business to check to see if your intellectual property has been infringed by a competitor.

Depending on the relevant individual characteristics, patents, trademarks or copyrights can be utilised to protect different areas of intellectual property. These can be used to prevent competitors, or anyone else, from using your ideas for their own profit without your consent.

Trademarks are often not registered and domain names are not acquired. This can be costly and problematic further on down the line, particularly when the company is successful and people can demand substantial sums to sell those items to your business. It’s important to plan ahead and deal with these issues early in the life cycle of the business.

4. Protect your confidential information: Key employees and operational risks

Key employees within the team also have access to sensitive information about the business, including its client lists, budgeting and marketing plans, financial information and business projections. Start-ups typically give little thought to the ramifications if one or more of their key employees went to work for a competitor.

The clearest way to impose a duty of confidentiality is to set it out in writing within employment contracts, consultancy agreements or director service contracts; together with appropriately drafted post termination restraints. Furthermore, confidentiality or non-disclosure agreements can be utilised with 3^rd parties, alongside appropriate clauses within joint venture agreements. The general law around confidentiality is sometimes unclear and appropriately drafted documents can remove that ambiguity and reduce enforcement costs.

Employees and other people within the business often accumulate significant amounts of confidential information at home or on their laptops.

This has increased recently given the rise in flexible working and working remotely. It’s worth taking time to ensure that all confidential information is deleted from any devices retained by departing employees or consultants and all hard copies handed back.

It is also important for businesses to appreciate their obligations around GDPR and the need to safeguard confidential information. Having appropriate systems in place, appropriate contractual terms and employee training to prevent wrongful disclosure can save considerable time and expense. This is particularly important as the UK GDPR and DPA 2018 set a maximum fine of £17.5 million or 4% of annual global turnover, whichever is greater, for infringements.

5. Utilise expert contractors via flexible working models

The new normal has created a demand for more flexible working. As growing companies exit lockdown and seek to navigate the challenges and opportunities of the post lockdown landscape they will desperately need the skills, flexibility and savings offered by contractors.

The recent IR35 changes have made companies nervous about engaging contractors because of the potential tax implications. In that regard, IR35 reform may appear slightly anachronistic and short-sighted having regard to the impact of the pandemic on the economy.

So while the blanket approach adopted by a number of companies of not utilising and contractors may seem like an easy solution in the short term, it removes access to a skilled contractor workforce that wishes to remain flexible. This may damage businesses ability to scale resources up and down at short notice, something that is essential for growing businesses who may need access to expert services, although not necessarily on a full time basis.

Businesses that are forward-thinking, and proactive enough, to take the necessary steps to continue working with contractors who do not want to work within IR35, may find they can scoop up some of the best talents and gain a competitive advantage by accessing this pool of expertise. In light of this, a number of commentators have suggested that fears that the forthcoming changes to IR35 will spell the death of freelancing are exaggerated. It is of course important to bear in mind that the general legal principles that govern employee status will continue to apply. Therefore, by taking appropriate steps, both contractors and businesses can seek to ensure that they do not fall foul of IR35. Utilising appropriate legal frameworks will help SME’s access what is now a global pool of talent and gain a leg up on their competitors who adhere to a more traditional, conservative approach to engaging resources.

6. Nurture your permanent staff and create a sense of “tribe”.

Ultimately for your  business to have genuine value it must be able to operate independently of you.

An integral part of any business growth strategy requires investment in your staff and operational systems.

The most successful companies know that building a better workforce will streamline your business, improve productivity, and create the kind of company culture that will attract hard workers. Companies such as Google have amazing strategies for motivating employees and team building and their philosophy is: “To create the happiest, most productive workplace in the world.”

Creating a good workplace culture, and sense of “tribe”, among your employees is often difficult and time consuming to build but can very quickly be lost. It therefore pays to ensure that there are appropriate mechanisms in place for staff to feel that they are “heard” and to undertake adequate consultation with staff around changes to the business.

As your company grows, you can expand to include benefits packages, performance based remuneration and other discounts.

As set out below outsourcing key functions such as HR and Legal services can provide access to high quality services at an affordable cost and provide your business with corporate level services traditionally reserved for bigger, more successful competitors.

7. Outsource key business functions

Being an entrepreneur means there’s always more work to do, and not enough time to do it. To that end, entrepreneurs are often guilty of trying to wear all of the company hats. Recognise when you need help, and ask for it. That’s why the most successful business owners outsource key tasks to external service providers who specialise in providing valuable time-saving services for a fee.

Outsourced experts can provide cost effective technical skills and know-how to keep your operations running smoothly. Having access to flexible, reliable, expert resources that can be scaled up or down as you require them can assist your business with both strategic planning and the operational needs of the business as it grows.

All businesses need support and we believe that having those resources on hand is one of the best investments a business can make to help ensure the long-time sustainable growth required to make any business an attractive proposition to prospective buyers.

To speak with our Commercial Team or arrange your free no-obligation initial consultation to discuss your business requirements. Call 020 7099 4444 to speak to us, or book your consultation here and we’ll get in touch.