8 Critical “Exit Options” Every Small Business Owner Must Know
Whether a business owner wants to merely free up time, energy, and resources to explore other opportunities or realize his or her investment and walk away from the business without looking back, there comes a time when a business owner wants to stop. It is called “Exiting A Business.”
There are several exit options that the owner can choose from depending on his or her personal and business goals as well as the objectives of each of the other stakeholders. The personal and financial circumstances of the owner and other stakeholders are also critical in making the right exit choice.
The following eight "Exit Options" were compiled out the many available to owners today:
1- Transfer Ownership to family members
Studies show that 50 percent of business owners want to transfer their business to their children. In fact, less than a third actually do. Due to the low success rate of this option, a contingency plan must be in place that contains the transfer of ownership to other types of buyers. This option keeps the business within the family, and gives the owner the latitude to influence the course of the business. However, family dynamics may significantly alter the owner’s control over time and create some tensions, discord, and feelings of unequal treatment among the siblings.
2- Sell To Other Shareholders
This option is not available to all owners (Sole Owners in particular). However, when a business has shareholders, the owner may just have to sell his or her shares to the other shareholders and exit the company. This assumes that there is a Buy-Sell Agreement in place that delineates the process to follow to buy out a shareholder for a variety of situations. The quality of the buy-sell agreement will determine whether the buy-out is smooth or bumpy.
3- Sell to Management
This exit option gives the owner the ability to sell his or her shares of the business to the company’s management team (or part of the team). This is also known as Management Buy Out (MBO) or Management led Leveraged Buy Out (LBO). Since the management team has a lot of experience running the business, they are able to raise the capital necessary to complete the owner’s buy out through a combination of debt financing from banks, outside investors’ equity and their own equity investment. In addition, the management team can also use the assets of the company to finance a significant portion of the purchase price of the owner’s shares.
4- Sell to an Employee Stock Ownership Plan (ESOP)
Selling to employees of the company is another exit option available to the owner if he or she does not want to sell it to management only. An Employee Stock Ownership Plan (ESOP) allows employees to own shares of the company that are put in a trust funded by borrowed money from a bank. In this case, the company purchases the shares of the owner using a loan that is repaid through distributions to the trust. The company’s ability to make distributions determines the borrowing capacity of the trust and thus the cash available to purchase the owner’s shares. The company must buy back the employees shares when they leave the company.
5- Sell to a Third Party
Selling to a third party like a competitor, a customer or a supplier in the same industry is another exit option an owner can take. Buyers’ characteristics and motivations must be closely considered by the owner and his investment banker to determine if they fit the owner’s personal and business goals and objectives. To illustrate this, suppose an owner just wants to liquidate his shares in a business but remain in the management team, he will be looking for financial buyers. A strategic buyer may also be a good fit by offering the owner a “partnership” type solution with a simultaneous realization of at least a part of his investment. If the owner cannot realize his goals on his own, he may need a strategic buyer. A third party sale may be the best way to cash out.
6- Refinance or Recapitalize the Business
By refinancing or recapitalizing the business through debt, the owner could leverage its assets to obtain partial liquidity for his shares. In fact, the owner creates a partnership with a lender through this strategy. This is also possible with equity investors. With this approach, the owner may want to sell a minority or a majority interest in his company to another party while maintaining some interest in the company. This also works if the owner wants to stay around or remain involved in the company but wants some chips off the table.
7- Go Public
For middle market companies, a business owner can pursue this exit option. Going public or conducting an Initial Public Offering (IPO) is viewed as the ultimate exit strategy because it creates liquidity for the business owner, the managers, and the employees of the company. It raises the profile of the company, creating a sense of security for many big firms doing business with the company therefore attracting top-notch management. Aside from the fact that it is not a realistic option for many small business owners; there are many downsides to going public that owners may not be aware of. One of them is the loss of control of the company due to investors acquiring a controlling stake in the company and possibly firing the owner/founder.
8- Liquidate the Business
This exit option is the last resort when there is no buyer and the business lacks sufficient income-producing capacity (is loosing money). The value of the assets is higher than the value of the cash flow. The owner’s only option is to sell the assets at liquidation value. However, he does not have to liquidate the entire company. He can keep the portion of the company that is more profitable. This option involves employees and management losing their jobs.
Achille Ekeu, MBA, CVA
President & CEO
The Washington Valuation Group
Achille is a Certified Valuation Analyst (CVA) member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter. He provides valuation services for Estate and Gift Tax, Purchase, Sale of business, Debt Financing, Buy-Sell Agreements, and Litigation Support in Divorce/shareholders disputes cases. He can be contacted by phone at 240-274-9570 or by email at firstname.lastname@example.org.