I’m often asked about exit strategies for private business owners. I’ve only been able to come up with four basic ways for an exit from a business. In each of these there are sub-sets but for most these are the ways you can or for that matter will leave your business. That is of course as long as you leave before you die.
The four ways to leave your business are:
You can sell your business to an outsider or a third party. This is where you sell your business to someone outside of your family or present business family. This buyer will either be a financial buyer, a strategic buyer, or an intellectual capital buyer.
A financial buyer is someone like a private equity group. They will look at your business from what they can get as a financial return only.
A strategic buyer is often the competitor you like the least. This buyer will take a look at your overhead as something they will cut after they take control of your business. The strategic buyer can often afford to pay more for your business than a financial buyer.
The intellectual capital buyer is the most rare of outside buyers. The intellectual capital buyer is more interested in what they can do with the intelligence held within the company than they are with the actual cash flow from the company.
You can transfer your business to your managers. This transfer method is often satisfying to the selling owner. They get to see the business continue under similar methods as when they ran the company. Their stakeholders are often taken care of and treated well.
The problem with a sale to managers is that managers rarely have any money. This means the selling owner will be holding paper (or being the bank) for the sale. When an inside sale is done we recommend having the owner stay involved in the business until the note is paid off from the buyers.
You can transfer your business to your children. Today we’re seeing less and less children interested in taking over the family business. At the same time, for those families that want to do a transfer to family, the transfer can be very satisfying.
We recommend that a business is sold to children and not gifted to them. When a business is sold to children, the children will be making a decision that the business is a good one. They have committed to putting their own hard earned cash in the business (even if the money comes from business profits.)
You can liquidate your business. This is often the default option for those who have not planned for how to leave their business. In almost every instance business liquidation, whether it be controlled or forced, is not the best way to leave your business. You will often be left with less money and have more trauma along the way.
The one exception to this is when an owner just decides to wind down their business. This is a good way for many owners to end their business career.
You really should consider passive ownership as a step along the way. We believe that every business owner should consider passive ownership as a logical step along the path of exiting their business.
Passive ownership is where the selling owner completely gets out of the day-to-day operation of the business. A passive owner will have to install systems in the business that allows others to know what’s important in running the business.
It’s your turn. Decide how you want to go through an exit process in your business. What are the steps that you think are most important? Take one of those steps and put an action plan together. We find starting a process will lead to more steps. The more exit planning steps you take, the better the outcome is likely to be.
We have put together a complementary coaching process called The Exit Planning Assessment. This process provides a coaching call on eighteen key areas a buyer would look at in your business. You will have a call with no charge as well as a report that outlines a projected value of your business, the gap you could fill and strong and weak parts of your business. Click on the button below to start the Exit Planning Assessment process.
Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.
This article is published for residents of the United States only. Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.