Are you a business owner thinking about exiting your company? Which exit strategy will benefit you most? It’s a tricky move to undo, and you should know the pluses and minuses.
While the number of exit routes seems unending, you generally choose from only eight:
- Transfer the company to a family member.
- Sell the business to one or more key employees.
- Sell to employees using an employee stock ownership plan.
- Sell to one or more co-owners.
- Sell to an outside third party.
- Engage in an initial public offering.
- Become a passive owner.
While your emotions during the exit process can sometimes overwhelm you, your decision-making can be relatively straightforward, so long as you keep the end in mind and do some up-front planning.
Planning early is vital.
First, establish personal and financial objectives to identify the best buyers for your business. Second, determine the value of your company. Finally, evaluate the tax consequences of each exit path. Let’s explore the eight exit strategies.
Transfer to a family member.
Owners usually consider transferring businesses to family members for non-financial reasons. Among the advantages is that this transfers the company to a known entity, provides for the well-being of your family, perpetuates your company’s mission or culture, and allows you to remain involved in the business.
- little or no cash from closing available for retirement
- increased (and continued) financial risk
- required owner involvement in the company post-closing
- children’s inability or unwillingness to assume the ownership role and
- the family issues that surround treating all children fairly or equally.
Transfer to the key employee(s).
With this type of transfer, you hope to achieve the same objectives as when transferring the business to a family member: to attain financial security (albeit potentially over time).
Disadvantages of this route resemble those in family transfers and include employees’ possible inability or unwillingness to assume ownership.
Transfer via ESOP.
These qualified retirement plans must invest primarily in the sponsoring employer’s stock. In addition to the advantages of a standard transfer to key employees, you enjoy tax benefits and cash at closing.
Again, though, not all aspects of this route benefit you. ESOPs are costly and complex, offer limited company growth due to the borrowing necessary to buy the owner’s stock, net less than the total value at closing compared with third-party sales, and use company assets as collateral.
Sale to co-owners.
Advantages again resemble those of transferring your business to a family member. Disadvantages include the need to typically take back an installment note for a substantial part of the purchase price and, as in other avenues, increased financial risk, owner involvement past closing, and normally netting less than full fair market value.
Sale to a third party.
This generally offers your best chance at receiving the maximum purchase price for your company and the maximum amount of cash at closing. This route appeals to owners intending to leave after they sell and to owners who want to propel the business to the next level with someone else’s financial support. It also allows you to control your date of departure.
- potential loss of your identity as the business owner
- possible loss of your corporate culture and mission
- Potential detriment to employees if you sell to a party that seeks consolidation and
- Part of the purchase price may be subject to the company’s future performance after the sale.
Your company needs to be worth over $250 million for the IPO route to be considered an appropriate exit option.
This attracts owners who wish to maintain control, become less active in the company, and preserve the company culture and mission. Your disadvantages stem from you never being able to leave the business permanently, you receive little or no cash when you leave active employment, and you continue to carry the risk associated with ownership.
Only one situation justifies this route: You want or need to leave the company immediately and have no alternative exit strategies. Liquidation offers speed and cash but can bring enormous disadvantages:
- yields less money than any other exit route
- comes with a higher tax burden than any other type of sale/transfer and
- has a potentially devastating effect on employees and customers.
Consult Your Financial Advisor
I am available to offer guidance, examples, and market perspectives and help you carefully compare each path to your final objectives.