Once you have completed a valuation and know what your business is worth, you should think about who exactly can buy your business. There are various exit options available to business owners. The key to Ingredient 4 of the exit planning process is to identify which exit option will best accomplish the goals defined in Ingredient 1. The exit options generally fall under two categories: internal transfers and external transfers.
The internal exit options include a transfer to the next generation, the existing shareholders, management or the employees. Some of the advantages and disadvantages of each option to consider include:
| |
Internal Transfer
|
Advantages |
Disadvantages |
| 1. |
Family member |
Business stays in the family
Can be a timely and seamless process
Avoids information leak and confidentiality issues |
Likely will not maximize price
May cause family discord
May not receive cash at closing |
| 2. |
Shareholders |
Existing shareholders know the business
Can be facilitated through SH agreement
Funded with proceeds from life insurance |
May not maximize price
Potential dispute if poorly prepared SH agreement
May not receive cash at closing |
| 3. |
Management |
Management team knows the business
Avoid information leak and confidentiality issues |
May not maximize price
May not receive cash at closing
May require additional debt or equity financing |
| 4. |
Employees (ESOP) |
Allows gradual exit over time
Increase employee productivity and company profitability |
May be a lengthy process
Business buys back shares if employees leave |
| |
External Transfer |
Advantages |
Disadvantages |
| 1. |
Third party sale – stay or leave |
Potential to maximize price
Strategic buyers may pay a premium
More likely to receive cash at closing |
Information leak and confidentiality issues
Could be a longer process
Buyer may require VTB or earnout
Issues with transferability of customers and relationships if owner leaves |
| 2. |
Public offering (IPO) |
Provides additional capital to fund growth
Gives company a higher profile
Valuation multiples are higher |
Need high revenues, earnings and growth
Business owner could lose control
Time consuming and very costly
Securities regulations |
| 3. |
Refinance / recapitalize |
Owner can take some money off the table and diversify risk
Owner can remain actively involved |
If debt used, increases leverage and risk and may require personal guarantees
If equity used, owner now accountable to equity partners |
| 4. |
Liquidate |
Generally simpler and faster |
Lower net proceeds due to liquidation costs
Loss of jobs and severance costs |
Serious consideration should be given to each of these exit options. The options that will best achieve the business owner’s goals warrant further analysis and investigation. Once you know which options work, you want to think about how to calculate the net proceeds, which is the fifth ingredient to a successful exit.