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Exit strategy: the key to maximising value

Alistair Wardell Alistair Wardell

What might drive the need to exit underperforming operations? Alistair Wardell looks at the importance of having an exit strategy in place.

Senior management will know that time can be your greatest asset. Many will be familiar with the 80/20 rule - otherwise known as Pareto’s Principle - which states that 80% of your results typically come from 20% of your effort, suggesting that to maximise efficiency, businesses should focus on the vital 20%.

What if, however, a large proportion of your time is pulled in the opposite direction by underperforming or loss-making products, subsidiaries or locations? Making the decision to exit can be hard. But done at the right time and in the right way, exiting non-core businesses can free up cash, resources and time to ultimately drive growth.

What can drive the need to exit?

Over the past year, much has changed. While some sectors may quickly bounce back once lockdown restrictions are over, other sectors will experience long-term structural change.

An example of this would be retail. With accelerating online sales, many high street retailers may face challenges even after all restrictions are relaxed. Many businesses will have taken on levels of debt from government support packages, which may be unsustainable, especially if structural change in your sector means that demand for your product or service has reduced.

Brexit will also have changed priorities for some businesses. Extra charges, paperwork and taxes may lead firms to question the viability of certain locations. A greater focus on environmental, social and governance (ESG) issues is an example of another area driving long-term consumer change, and we've already seen this start to impact lending and investment behaviour.  

M&A activity can also drive management to dispose of non-core operations. The recession we've all witnessed over the past year has been different to past ones where investment levels have dropped. Unlike the 2008/2009 recession, this wasn't due to fault lines in the market, but because restrictions were imposed upon us.

As such, funding is still plentiful and investors are looking for opportunities. Many private equity (PE) houses raised significant capital before lockdown which they have yet to deploy, and we've seen solid demand across sectors.

Companies may make the strategic decision to be market leaders. Jack Welch, Chairman and CEO of General Electric until 2001, often emphasised the need to be number one or two in your market, believing ‘mediocre’ players will eventually lose out: ‘If you cannot win, it is best to find a way out... Focus on your core strengths, and get rid of weak businesses that slow you down.’

Whatever the impetus, having an exit strategy is key to enable management to decide to improve, sell or close any non-core or loss-making operations.

Improve, sell or close?

Our team works alongside you to evaluate options when there is an underperforming business, developing the most appropriate exit strategy.

Where improving the business is a possibility, we introduce turnaround professionals to help you think clearly about the immediate issues, as well as your ambitions and objectives for the future. Using dedicated resources, such as the CEO Room, we help you build, stress test and implement an appropriate strategy to improve sustainable profits.

Should a disposal be the best strategy, we position the business to maximise value, effectively targeting buyers and managing the sale process. We work to reduce any disruption on core businesses that could be entwined with the non-core unit for sale. We manage the whole process, saving time, cost and minimising reputational risk.

If the best option is to close the business, we deliver a comprehensive and cost-efficient closure programme. We support on all matters from tax planning, pensions advice, minimising directors’ and shareholders’ liabilities to providing practical support for dealing with suppliers, customers and employees.

Ultimately, our goal is to realise maximum value from your business and to free up precious management time.

The importance of an exit strategy

Being proactive when faced with loss-making or non-core businesses is essential. When management don't have an exit strategy or act in a timely way, a business can quickly become stressed or distressed. In these circumstances, management often face a vastly reduced set of options as events move outside their control.

An unplanned closure increases the risk of higher closure costs, potentially leading to insufficient funding and inadequate resources, and perhaps insolvency. You also expose yourself to potential claims from employees, customers or creditors. A lack of exit planning can also have tax implications, with unnecessarily high tax costs. Negative publicity can also be extremely damaging.

Being prepared when running a business is crucial. This should include your exit strategy to maximise benefit, as well as to minimise damage. Working with advisors experienced in this process adds significant value.

For support with your exit strategy, contact Alistair Wardell.

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