How is your startup planning for exit?
2023-06-27How is your startup planning for exit?
Whichever way you look, new and improved solutions are being created and implemented to make our lives more efficient, greener, easier, and so on. Innovation is in huge demand, and tech businesses are moving at incredible speeds to keep up.
In the first five months of 2022, UK tech start-ups raised £12.4 billion pounds. That’s nearly 80% of all venture capital raised by all start-ups in 2022 alone.
Moving at such a pace is thrilling. But, with such speed, it’s not always easy to balance thinking about the present and the future.
Raising capital and innovating are the crux of what drives the success of a start-up. So, considering selling your business and making your exit plan – especially in the early years – might feel like an unnecessary thing to think about. Especially when you consider the number of plates that are already spinning for start-ups.
However, having a clear business exit strategy – even early on in your journey – is integral to business success. Knowing your ultimate goal helps you to understand what financial goals to set and meet in the short-term.
How much do you want to sell for?
Knowing this will be an art, not a science. It will undoubtedly fluctuate as your business evolves. What you have to sell in the first few months will be very different to after a few years.
However, having a goal will help you understand what you need to do to meet your targets. From employing staff and deciding on how to incentivise them to balancing taking dividends vs reinvestment of profits, a lot of financial decisions will be driven by your end objective.
Additionally, with your aims in mind, your finance team should be able recognise any upcoming hurdles that could hinder progress. If this happens, they’ll know the best way to re-route your journey to ensure you stay on track.
Your finance team should also work with you to understand the tax you and your team need to pay when you exit, therefore how much money you need to have saved.
Making a profit on a sale will mean paying capital gains tax (CGT). However, there are different rules around how much CGT you’ll pay.
For example, there’s Business Asset Disposal. If you’ve owned the business for two years or more, you could pay a lower rate of 10% in CGT. This is rather than 20% (higher rate taxpayers).
Employees with share options that crystallise on the sale of your company will also be liable to tax on the gain. Depending on how you set up the option scheme the tax due can vary from 10% to 40%, so it’s important you get this right.
When do you want to leave your business?
Are you staying in your business for decades, or are you starting a new venture in five years’ time? When you sell, are you planning to stay in the business to help with the transition and for how long? Whatever you decide to do will have an impact on your plan between now and exit, especially from a financial point of view.
The most important thing will be that, whether you exit quickly or slowly, the trend of growth should be steady. There shouldn’t be any significant peaks or troughs in your financial reporting. If there are, investors will have a lot of questions that might not be the easiest to answer.
Knowing when you want to exit will enable your finance team to draw up a bespoke plan. This will help you reach your time-bound goal while achieving your definition of financial success at the same time.
Don’t leave planning until the last minute
The later you begin planning exit, the longer it can take to reach your goals. Buyers will be looking for accurate financial information, which has been prepared on a consistent basis, to support their valuation.
They’ll also want a raft of other information like customer and supplier contracts, employee details, and detailed forecasts.
Haven’t got these in order from the start of a business’s journey? It can take months to get back on track, distracting you from the day job at a time when you need the business to be performing.