In planning an exit you have to establish three key objectives:
- When do you want to exit?
- How much do you want from your business?
- Who do you want pass your business on to?
You may well have other objectives, most business owners do, but all need to address these key objectives. So how do you go about determining your objectives and what will work best for you? Lets start will objective three.
Who do you pass the business on to?
You have eight basic options:
- Transfer the company to a family member(s)
- Sell the business to one or more key employees (Management buyout)
- Sell to all employees using an Employee Stock Ownership Plan (ESOP)
- Sell to one or more co-owners
- Sell to an outside third party
- Engage in an Initial Public Offering
- Retain ownership but become a passive owner
- Liquidate
Studies show about half of all owners would like to sell to a third party, about 10% would like to do an IPO and remainder would like to transfer to insiders being family members, key employees, or co-owners. But what we want and what we end up hav¬ing to do are often quite different. While many business owners do want to sell to third parties many will find that their businesses are not very attractive to 3rd par¬ties. Others will want to transfer to insiders only to discover that these insiders don’t have the ability to secure the fund¬ing needed to make this happen.
You should do a little homework and understand what each of these options could mean for your business. You might not have considered an ESOP for example, but this might indeed turn out to be a good option for you given your particular circumstances or it could be just the opposite. The key point is to become educated. You will not really know unless you dive into what some of these options might mean for you.
How much do you want for your business?
“As much as I can get!! Fair Market Value, Highest price possible.” This question sounds simple but it is not. You may want to think in terms of what you get for your business after taxes — what you will actually be taking home — and focus less on the selling price. This is especially true when if you find yourself need¬ing to transfer to insiders. There will be various ways to achieve the transfer and each will have tax and net dollar amount advantages and disadvantages. Your financial objectives may seem obvious but getting to that objective involves careful consideration.
When do you want to exit?
Again, a seemingly simple question that needs to be well thought through. Your personal considerations, “I’m sick to death of this business and want out right now” or “I love what I do and will never leave”, may need to be tempered with financial and practical realities. You may have health or family related issues that will drive this objective. While you may want to leave tomorrow, your business may in its current state, be totally un-sellable. Worse, you may only attract very low offers with all-outs and claw-backs and other disagreeable terms. You may find that in order to fund your retirement you need your business to generate a certain dollar amount and that this amount is higher than that your is business is currently worth delay¬ing your exit into the future. The timing of your exit is a critical objective of your plan and the implications of your choices need to be well understood.
So what does this all mean for you? Setting your primary exit objectives requires some knowledge about your options and an understanding of the implications of various paths. And remember, the sooner you start the more options you will have. This is not something you should wait to do when you finally decide you should sell.
One way to achieve a financially rewarding exit is to have a growing business. Begin with a realistic strategy and plan. For more information review our Business Strategy service.