In 2002, when I was in the process of setting up one of my first limited companies, a good friend said to me, “Andy, always have an exit plan!” I had no idea what he was talking about, and have swept the whole idea under the rug for a while. Little did I know at the time that this was the best business advice I had ever been given.
What is a Business Exit Plan?
Traditionally, in the business world, an exit plan usually revolves around selling a company. However, I will talk about an exit plan in a much broader sense. Most businesses don’t sell, but many people want to close a business to do something else. Add to that, and I realize this is a bit morbid, but everyone dies…including you! An exit plan is about withdrawing from the business in a controlled manner. Points to consider:
- What happens if you want to do something else?
- What happens when you die?
- What happens if you want to sell the company?
- What happens if your business partner dies?
- What if you want to bring someone new into the company?
Do you have a business EXIT PLAN?
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The impact of not having an exit plan
To better explain the importance of a business exit plan, let me tell you a story. This is a true story with some key facts changed to protect the identities of those involved. Aside from the nature of the business and the names involved, this all actually happened to a good friend of mine.
At the beginning
My friend James has always been excited about starting his own business. We were great drummers and loved helping others play. After a few late-night conversations and minimal planning, he finally decided to open his own drum shop.
It was hard work, but after many sleepless nights over a period of about three years, he finally started making some money. He had some simple premises and the business paid for itself. James didn’t actually earn his wages, he reinvested everything he earned back into the company. Luckily he had a very supportive wife and they made everything work out.
Time to expand
Eventually, James decided it was time to expand. He was fed up with low-margin sales and people coming in to try out a drum kit only to buy it on Amazon for £10 cheaper. He needed better customer quality and this required entering a more professional market.
This was difficult as James was already working 10 hour days and had little free time. Luckily, a friend of his was looking for a change of scenery and he was a perfect fit for the company. Paul joined the operation and things really took off.
Unlimited success
They did everything by the book. They formed a brand new limited company. Invested even more money in the business and even signed a new business lease for more professional space. The stage was set and new customers arrived. A more professional customer group interested in a more personalized experience from tech-savvy individuals.
The partnership worked great. Paul handled the morning shift, preparing new inventory and preparing customer orders for pickup. James handled the late shift, sales and general management. It was a great team and the business grew because of it. It quickly became profitable and before long they were able to pay themselves a small wage. It was VERY busy but they were happy. Business was finally moving in the right direction.
The unthinkable happened
One morning James arrived at work and found no sign of Paul. That was really unusual. Paul was an early riser and was never late for work. James checked his voicemails — nothing. He tried calling Paul — no answer. He became distracted when a customer came into the store, but was still a little confused about what was going on.
Then, at 11 a.m., his phone finally rang. It was Paul’s wife Jane. That was unusual. Paul’s marriage wasn’t in good shape — they were on the verge of divorce and James really wasn’t getting along with Jane. So it was strange and inconvenient for her to call, to say the least.
Jane wasn’t feeling well. She sobbed, barely able to get her words out. Paul was out for his usual early morning run when he was hit by a car. He was rushed to hospital but died a few hours after his arrival. Jane was silent. James was silent.
Life went on
James was completely desperate, but immersed himself in the business. It reminded him of Paul and he did his best to carry on. Stiff upper lip and stuff. However, it was a challenge. Even when they were working together, they barely had time to stop. Now James was working 12 hour days every day. He hasn’t had a single day off in months.
Meanwhile, things weren’t going well with Jane. Family members randomly showed up at the store and took notes. He asked strange questions about how much stock he had and how busy it was. James tried to speak to Jane to discuss Paul’s shares in the company, but she never returned his calls.
The penny has dropped
Paul and James were each half shareholders in their limited company. When Paul died, his share of the business passed into his estate. He left no will, so Jane inherited everything… including 50% of James’ business.
Although Jane had no interest in the day-to-day running of the store, she knew full well that 50% of everything was hers. She took great pleasure in watching from the sidelines as James worked his fingers to the bone. He repeatedly tried to reach an amicable agreement to buy her freedom, but she would have none of it.
The downfall of a successful company
In the end it was all too much for James and he had no choice but to close the business. Jane wasn’t willing to negotiate and James couldn’t spend his whole life building a business for a person he didn’t even like.
He sold his shares to a competitor and used the money to buy his way out of the business lease. It took about six months, but he finally closed the door to his shop for the last time. He was broke and the dream was over.
That will never happen to me!
This may sound like an extreme scenario, but it happens all the time. People die. Business partners fall out. Circumstances change. Everything ends… one day. The frustrating thing is that this could all have been avoided.
Preparing a business exit plan
There are several methods that the situation James found himself in could have been avoided. They had been so busy that they simply hadn’t thought about “what if” and what was left was a mess. All they had to do was sit down with their accountant (or lawyer) to discuss an exit plan. Typically this can be documented in five ways:
IMPORTANT: You MUST seek the help of a professional to help you with this. A good place to start is with your accountant, who has almost certainly experienced this with other companies. You can also try a lawyer who specializes in this area.
An informal business exit plan
I wouldn’t really recommend the informal route as it can sometimes be more confusing than no exit plan at all. But under certain circumstances it can work. At least sit down with your business partner and discuss the entire situation. If possible, document your decisions, sign the consent, and make sure your family knows what is going on. If you don’t have a business partner, simply sit down with a family member for an hour and explain to them what should happen in the event of your death or serious illness. However, this is not a replacement for the more formal route.
Statutes
If you have a limited company, you may already be covered by your articles of association (we’ll just call them articles of association). The articles are the rules of conduct for how your business operates. They are usually based on Standard model item However, your business formation agent may have used specific items suitable for these types of scenarios. If you don’t have your articles to hand, you can download them from Companies House.
The two main disadvantages of including this type of information in your articles are:
- They are public
- They are a little more complicated to change
Check with your accountant or lawyer to see if your articles already contain clauses covering what should happen in the event of the death of a shareholder, etc. Make sure you understand this and don’t be afraid to ask questions!
Cross option agreement
A cross-option agreement is generally a simple contract between shareholders that gives surviving shareholders priority in repurchasing the deceased person’s shares. They are usually purchased together with an insurance policy to cover the cost of purchasing these shares at a fair market value.
Shareholders Agreement
A shareholders’ agreement has a broader scope. Typically it will contain some type of cross-option agreement as well as additional details, such as what happens if a shareholder wants to leave the company.
become shareholders
While you wouldn’t necessarily include details such as a shareholders’ agreement in a person’s will, it is important that shareholders’ wills are reviewed throughout the process. In the event of the death of a shareholder, the rules of inheritance or the provisions of a will apply. While a company-specific agreement (e.g. a shareholders’ agreement) will generally prevail, it is important that the terms of the will do not conflict with the terms of these agreements. It is therefore normal to examine the declarations of intent of all shareholders in parallel with the conclusion of these agreements.
No panic! But take a business exit plan seriously
Just by reading this you are already ahead of the curve. Most companies don’t consider these options until it’s too late. Start with an informal conversation with everyone involved. Document your decisions briefly and contact an attorney at the earliest opportunity to formalize the matter. A few careful hours now could prevent later stress for months or years.
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Last updated on September 20, 2024 by Andy Mac
