As a business owner, it is important to prepare well in advance for your exit from the business. One of the most important decisions you will make during the exit planning process is how you will exit your business. No matter which way you choose to exit the business, make sure you start planning early.
The six most common ways to exit a business are:
1. Private Equity
Private Equity firms (PE) raise funds from institutions and wealthy individuals and then invest that money in buying and selling businesses. Private equity firms have substantial cash and resources to invest; it can be very attractive to get an ‘all cash deal’ and not have to concern yourself with a buyout over time or a vendor note that is dependent on the future performance of the company. In today’s business climate, there is significant capital available for these types of investments and the firms are skilled at proposing and closing deals. But did you get the best deal possible? Maybe, but maybe not, as their objective is to get your company for the lowest value possible.
2. Family Transition
A family transition is a traditional model where a business is passed on from parents to children over the generations. A full 25 – 30% of businesses still pass on in this fashion. The advantages are very simple – the children typically learn the business from the ground up, and have had a part in the growth from the beginning. If they have been groomed to take over, they should have the skills and experience to run the business.
Many business owners want their legacy to continue. The risks, of course, are just as apparent – perhaps the children don’t want to take over, or perhaps they are not as capable as their parents. Passing on a family business is a major, life-changing event with a host of complex issues and potentially difficult decisions. While it may result in family strife, if done well through proper planning, it also has the potential to be a golden opportunity to realize business, family, legacy and philanthropic goals after years of hard work and sacrifice.
3. Outside Sale
Many business owners that decide to sell wish to leave their business completely, either to retire or to move on to another entrepreneurial project. The most likely way for this to happen is to sell the entire business at once to an outside buyer. Selling your business to an outside buyer will often give you the most money upfront, however this larger paycheck can also lead to higher taxes owed on the proceeds of the sale.
The success you have when selling your business to an outside buyer will largely be determined by your level of preparedness for a sale as well as the state of the mergers and acquisitions market. In order to increase the likelihood of a successful sale, start the planning process early. Having a team of advisors (business broker, lawyer, accountant) in place will ensure you receive the best advice possible when selling your business to an outside buyer.
4. Management buyout
When a business owner has built a successful business and strong leadership team, they may choose to sell their business to the existing management team. This type of transaction often occurs when the business owner believes that management will be able to continue to run and grow the business.
In a management buyout scenario, the business owner may have to take a note (debt) from the employees purchasing the business if they do not have the cash to do so right away. Repayment of this note will depend on the future success of the business, and is therefore riskier than an upfront cash payment from an outside buyer. A management buyout generally best suits larger independent businesses with a strong non-ownership management team.
5. Employee stock ownership plan
An employee stock ownership plan (ESOP) is a type of defined-contribution benefit plan in which the contributed funds are invested in the stock of the employer. This type of ownership transfer is best suited for owners who wish to retain some ownership, and possibly control of the business while passing on an ownership stake to trusted employees. An ESOP may also allow the business owner to receive a higher value for their business if the mergers and acquisitions market is weak at the time of sale.
However, establishing and operating an ESOP will incur further expenses to the owner. Additionally, if a promissory note is accepted as partial payment, the debt payments may negatively impact the future cash flows of the business
The final way a business owner can exit their business is through liquidation. This type of exit involves closing the business and selling all of its assets while paying off remaining debts. While it is a decision most business owners never want to make, it is possible that selling off the assets owned by the business offers the highest value possible, and may be the only option available.
Businesses are can be forced to liquidate for a number of reasons. A forced liquidation may be chosen due to unexpected events, such as the owner’s death or long-term disability and is often necessary because of the lack of a succession plan. For this reason, it is important to plan early in advance, even if you have no intention of exiting the business soon.
Are you thinking about selling your business? Download our free e-book on exit and succession planning here.