The Basics

Firstly, what is exit planning?

• Business exit planning is the steps you may take as a business owner when you retire or leave for other reasons like legal or personal complications.
• The goal of exit planning is to maximize the value of your business while transitioning the new owner as easily as possible.

We know for many business owners like you that the business is your baby, but at some point, you have to let your kids leave the nest, right? And after many years and countless hours you deserve to have a smooth transition into your next phase of life.

Let us break down your options, because luckily, you have plenty.

Your Options, the good and the not so good

1.     Family Succession (NOT the hit HBO comedy-drama series)

For small or family-owned businesses it is a common goal to “Keep it in the family”. Could this work for you?

Pros:

-          Even if you leave your position of leadership, close ties with your successor allow you to advise and support them ensuring your business thrives.

-          Easy to maintain the company’s culture, mission and customer relationships with the assumption those values are shared.

-          If the new owner has a connection to daily operations, the exit process can also be smooth for employees.

Cons:

-          Sometimes children or other family members are not interested in the business which defeats the purpose of this plan...

-          Often inadequate prep and training due to assumptions that successors understand the ins & outs of your business.

-          Family drama can be an issue, whether its jealousy between siblings or other emotional decision making issues.

2.     Management Buyout

Management buyout is when you sell your ownership stake in the company to an existing manager or group of valuable employees.

Pros:

-          Fairly seamless leadership & management continuity for both customers and employees.

-          Since this buyer is familiar with the business, the sales process can be quick with a shorter due diligence period. Due diligence is when the buyer can learn more about the company before the sale is complete.

Cons:

-          This is only possible if the interests of management and employees align.

-          It is rare to find managers with financials to buy a business without loans, which slows down the sale overall.

3.     Partner Sale

Are you a co-owner? Your exit plan can involve selling your stakes to your partner! Many partners are also already involved in a buy-selling agreement which is a lot like a Will for a business for when a partner dies or leaves.

Pros:

-          This is a straightforward path considering a partner would already be invested in the business’s success, causing little disruption.

-          Typically a fairly straightforward process as compared to other exits, as there may already be a buyout agreement in place.

Cons:

-          This only works if the partnership is in good standing with one another and the buyer(s) are interested in increasing their stake in the business.

-          The business may even sell for a lower rate if it is to a partner.

4.     Employee Stock Ownership plan

An employee stock ownership plan or ESOP gives employees ownership through a trust fund. It works as a business exit strategy by allowing you to sell some or all your company stock to the ESOP trust at fair market value.

Pros:

-          Gradual transfer of ownership to your employees over a number of years at your own pace and it is tax-advantaged!

-          Selling owners can stay involved and keep a role in the company, especially as ownership transfers.

Cons:

-          ESOPs are ideally designed for large and high-revenue companies.

5.     Third-Party Sale

A Third-Party sale involved selling your company to an outside buyer. Examples of this could be an investor, private equity firm, or competitor.

Pros:

-          Outside buyers typically have the funds to pay for ownership in full. This means you don’t have to accept discounted or delayed purchases.

Cons:

-          In the event you fail to sell your business then take it off the market, you can taint the marketplace and leave bad taste in the mouths of potential investors. This usually happens in rushed situations when owners are trying to leave the business fast.

Which is the best exit plan option?

The beauty of that question is: There is no one answer. The best business exit plan relies directly on your finances, lifestyle, and legacy goals.

Need help figuring that out? As a seasoned financial professional with experience in exit planning, I can help you develop comprehensive exit plans ensuring a smooth transition of business ownership.