Summary
- Business exit planning is how business owners prepare their company for the transfer of ownership.
- A clear plan can help the company maintain business continuity and brand integrity while preserving value.
- Business owners may have different exit goals. Some may want to maximize the value and sell, while others may want to pass on ownership to family or employees.
- Some exit options include a third-party sale, a management buyout, generational transfer to family, an employee stock ownership program (ESOP), or an IPO.
What is business exit planning?
Business exit planning is how business owners prepare their company for the transfer of ownership. It considers the legal, tax, personal, business, and financial issues for the transfer or sale of your company.
Exit planning is important so you can leave your business in a solid position while providing enough value for your own personal goals to move forward in life. Starting five years in advance is advisable to maximize value and give you the most optimal options.
You want the business to run smoothly, retain employees, keep customers happy, and run the business after you step away.
There are some important strategies to keep in mind for developing an effective exit strategy.
What are the benefits of an exit strategy?
A clear exit strategy has many benefits. These include the following:
- Business continuity and long-term planning: An exit strategy allows the business to continue after key leadership takes a step back.
- Preserves financial goals: An exit strategy helps preserve your financial goals and leaves less to chance.
- Attract investors focused on exits: If you have an exit strategy in place, you may attract investors from private equity and venture capital firms.
- Maintain value: An exit strategy can help maintain the value of your business. Without an exit strategy or a clear plan for business continuity, the business could lose business and value.
- Align expectations of family members or successors: With an exit strategy, discussions on management, control, and finances have a place. Conflicts with family members or partners can be minimized when there’s already an exit plan in place.
What are the types of exit strategy options?
Business owners are faced with a number of choices on how they want to move on from their business. Some exit strategies will make more sense to you than others. Here is a quick rundown of some common options to consider.
Succession by family
What it is: Transfer ownership and management to family members.
When it makes sense: Look for financial readiness, competence, and experience in the successor. You may want to ask if the successor has the ability to serve both the company’s and the family’s long-term and financial goals.
Benefits:
- Legacy and generational commitment continues.
- Lower cost.
- More control.
- Business continuity; customers and employees may see less disruption.
- May remain as a consulting role or continue to be involved in some way.
- Motivation from the seller and buyer to see continued success.
Drawbacks:
- Family conflicts
- The successor may not be fully ready.
- Financial commitment from you may continue.
- There are unique legal and tax considerations.
- May see a lower sale price.
- Key employees may leave.
Sell to a third party
What it is: Marketing and selling your company to an outside buyer. These can include a strategic buyer, a competitor, a financial buyer, a private equity firm, a foreign buyer, and more.
When it makes sense: If your business is strong, and there are favorable market conditions that allow you to maximize your exit, selling to a third party could be the right move.
Benefits:
- Higher sales price and cost-effective.
- May be able to walk away faster.
- More cash upfront.
- Minimize risk to the owner.
- Deal structure is straightforward.
- May avoid family business conflicts.
Drawbacks:
- Requires significant time from professionals for due diligence.
- Long process
- Emotional for the owner to let go of the company.
- Lose control of your company at closing.
- May have tax consequences, depending on the structure of your company.
Management buyout
What it is: An exit via management buyout (or MBO) is where the sale of the company goes to a group of internal leaders of the company who offer to buy shares of your company from you.
When it makes sense: The continued success of the business is in the hands of the people who understand it best.
Benefits:
- More private process.
- Keeps key management positions intact.
- Continuity of business and culture.
- Faster process.
- Buyers have a stake in the business.
Drawbacks:
- Potential for a lower value.
- More risk is involved with lending to the new owner.
- Seller financing is likely.
- Managers aren’t always good owners.
- No longer in control, but still dependent on its success.
Employee Stock Ownership Program (ESOP)
What it is: An ESOP is a retirement program that allows employees to buy into the company. It’s strategic for owners who don’t want to negotiate the sale of their company to an external buyer. An ESOP may have tax benefits for both employees and the company.
When it makes sense: If you love the idea of transferring ownership to your employees in a tax-efficient way, you may want to consider an ESOP. You don’t have to find a buyer or negotiate the price of your company.
Benefits:
- More control over the transition.
- Tax efficient.
- Employees may be more invested in the business.
- Fair price for your company.
- Stability for employees and owners.
- No need to find an external buyer.
Drawbacks:
- Complex rules and regulations that require an expert to navigate.
- The business has repurchase liability, which requires the business to have enough liquidity to buy back shares from employees who desire to sell them at any time in the future.
- Generally better for gradual exits.
IPO
What it is: An IPO (initial public offering) is when a business is listed on an exchange to be publicly traded. It can be lucrative, but the process is more complex.
When it makes sense: Larger, profitable companies may be eyeing a listing on the stock market. Generally, a company’s revenues need to be $100 million or more. An IPO offers greater access to capital and can boost the reputation of a company.
Benefits:
- Higher valuations
- Capital for growth
- Attracts top talent
- Reduce corporate debt
- Becoming more well-known
Drawbacks:
- Long and expensive process
- Risk of not completing the process
- Loss of control
- Additional financial reporting is required
- Business information is now scrutinized by the public
Business exit planning: A step-by-step guide
Business exit planning doesn’t happen all at once, but a few steps can help get you thinking about what might happen for your own exit.
Step 1: Define your goals for the business
How you exit your business will depend on what your personal goals and timeline are. Do you need the maximum amount of money extracted from the sale of the business? Is your business generating significant revenue, and you’re ready to take steps toward an IPO? Do you need a plan for transferring ownership and management to family or employees?
You have options when it comes to planning an exit for your business, and knowing what your goals are can guide your decision-making process.
Step 2: Build your team
You’ll want experts on your side as you approach an exit from your business. You may want to engage the services of an accountant, attorney, financial advisor, brokers, M&A advisor, business valuation expert, and more. These pros can help you increase the value of your company before a sale, offer valuable tax planning and legal advice, make sure your personal financial goals can be met, or even help find a buyer for your business.
Step 3: Know your numbers
Determine how much your business is worth and what direction it’s trending from a business valuation. Also, be sure to take a look at your personal finances and determine how much you need from the business.
Once you know those two factors, it can help guide you to the right exit strategy. If you need to maximize profits through a sale or an IPO, you’ll do different things than if you’re planning to pass on the business to a family member.
Step 4: Evaluate the different exits and their pros and cons
Once you have a team of experts and know your numbers, you want to evaluate the different types of exits. As described previously, these can include passing the business on to family, a management buyout, a sale to a third-party, an employee stock ownership program, or an IPO. You may also consider liquidation, if necessary.
Step 5: Implement a plan to bridge the gap
Ideally, you’re starting years in advance so you’re able to realize the most ideal outcome. You may find adjustments that need to be made before your exit, such as growing the business for a higher valuation, training a successor, or saving more money.
Bottom line
An exit from the business you built from the ground up comes with many questions. Professional financial advice is invaluable at this point, and you’ll need an expert on your side. Unbiased can connect you to a financial advisor who’ll be on your side the whole way through.
Get matched with an advisor through Unbiased today.