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There are many options available for business owners to successfully exit his or her business. Most owners don't realize that there are many roads that lead to a successful transaction. Exit Strategies fall into three main categories: internal transitions, external transitions, and other transitions. This article will provide a little information about internal transitions of exit so you can start to narrow your focus on the types of plans that best suits your needs. There is one way to guarantee that a business owner won't be able to exit successfully and that is to fail to plan for it. #exitstrategy
TRANSITION TO INSIDERS: Typically about a third of business owners are interested in a sale to insiders. A transfer to insiders is arguably the most successful transition available to business owners today, primarily because it reduces risk and provides significant benefits to the insiders who take on the business. There are three primary types of insider transitions - a sale to family members, a sale to current management, or a sale to employees or ESOP.
Despite the challenges inherent to a family transfer, there are many offsetting rewards and benefits, all which stem from careful planning. 89% of family members are not interested in taking over the family business.
PROS:
- Usually family members have been involved in business already
- Great way to leave a family legacy
- Favorable way to transfer family|generational wealth
CONS:
- Many times "buying" generation wants to do things differently to leave their mark which sometimes rubs the "selling" generation the wrong way.
- Family communication issues
- Family members not inside the company may feel slighted
- Typically lower value transaction to the seller.
Transfer to Management is a type of transition commonly referred to as a Management Buy-Out or MBO. In an MBO, the current management secures funding from a bank, investment partner or the current owner.
PROS:
- Security of having well-seasoned management who already know the business.
- Secures your legacy as well as future payments to you or new investors
- Business is no longer dependent on owner involvement
CONS:
- Need to secure funding and usually, the current management does not have the ability to do so without help from the current owner - Possibly still involved in business
Employee Stock Purchase - business owners consider an ESOP exit strategy. This path is particularly appealing to those who wish to transfer their companies to known entities, perpetuate their current mission or culture, and keep their companies in their community.
PROS:
- Rewards your current employees and management by providing ownership in the company - Typically allows the owner to stay involved in the business post-transaction - Allows the owner to continue his long relationship with employees, vendors, and customers
- Retains the business owners sense of belonging
CONS:
- Somewhat complicated to navigate - The business owner and employees will need to seek outside help which
can be costly - The business has to be able to borrow or find investors to pay the owner at closing - Many times, the owner carries a long term note from the company, even though he’s typically no longer involved in the day to day operations of the business.