The Fourth Ingredient to a Successful Exit - Exit Options
Key TakeawaysBefore you go exclusive with a buyer and enter negotiations to sell your company, you want to know all the exit options you have. In this article, we provide a simple table that itemizes the various exit options that entrepreneurs have to sell their company.
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:
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Internal Transfer Advertisement
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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.
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Written by Jason Kwiatkowski
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