By: Srbo Radisavljevic, CFP®, CEPA®
If you own a business, you need an exit strategy. This is true even if you plan to run your business for the next 20 years, because your exit strategy should act as a guide for many of the business development decisions you’ll need to make down the road.
Here is a brief overview of the most common options business owners have for transitioning out of their business.
Third-Party Sale
Selling your business to an unrelated entity is called a third party sale, and for a good outcome, you need to be clear about your objectives. For instance, is your top goal to maximize the sale price of your business, or would you rather make a deal that looks out for employees and incentivizes them to stay? Identifying your priorities will influence which third-party you should sell to.
There are essentially two categories of buyers for third party sales.
Strategic buyers are interested in acquiring a company because of how they think it fits into their long-term vision and growth plan. They are attracted to a business because of its potential to be integrated into existing operations, create synergies and accelerate growth. Strategic buyers often have deep industry knowledge, such as a competitor looking to increase market share or diversify a service offering. A strategic buyer could also be a private equity firm that’s acquiring lots of small businesses for the purpose of merging them into one large company it plans to sell.
Financial buyers consider how a business will fit into their investment portfolio and tend to compare the benefits of a potential acquisition with other investment opportunities. Financial buyers focus on things like revenue enhancement, reducing expenses, and creating economies of scale. Financial buyers are often investors, such as private equity firms, who apply their financial expertise to increase profitability and bring a more objective perspective to business decisions.
Whether you sell to a strategic buyer or a financial buyer, a competitor or a private equity firm, you’ll need to evaluate the pros and cons of each option. The key is to be clear on your objectives before entering an agreement and identifying a third-party that aligns with the outcomes you want to achieve.
Family Succession
As the name suggests, family business succession is the process of transferring ownership and leadership of your business to the next generation. For family succession to work, you need family members who actually want to run the business and have the knowledge and experience to do so. That may seem obvious, but it often doesn’t happen. If the family wants to keep the business and there isn’t anyone capable of assuming leadership, they could hire someone to run it, but only if the company generates enough revenue to make the cost worthwhile.
If you’re leaning towards family succession, the key is to start talking with your family now to make sure it’s what they want. Assuming your family’s on board, you need to identify your successor/s and help them develop the knowledge and expertise they’ll need to run the business. One of the risks with family succession is that a valuable business is handed down to a family member who lacks the capabilities tomanage the enterprise, causing the business to flounder and ultimately lose value. In that case, the owner would have been better off selling the business and passing along the money to their family.
Most family businesses don’t last past three generation, which reinforces the notion that for family succession to work, you need to have these conversations early.
ESOP
An Employee Stock Ownership Plan (ESOP) is usually formed to facilitate succession planning in a closely held company by giving employees the chance to buy shares of the corporate stock. An ESOPs offer many benefits as an exit strategy for business owners. It creates the potential for substantial tax benefits, allows the business owner to transition out of the business at their own pace, and can be a good way to ensure continuity and protect the business culture after you’re gone.
While ESOPs present many opportunities, implementing one can be fairly complex and may not be the best option for every business. If you’re looking for quick exit, an ESOP is not the right strategy – it should be implemented five to ten years in advance. ESOPs also require a minimum of 30 employees, and if over half of your employees are over the age of 55 at the time you plan to exit the business, an ESOP is probably not be a good fit. Lastly, while ESOPs may leave your legacy intact, this approach may not yield the maximum sale price.
Schedule a Consultation
If you’re a business owner and have questions about exit strategies for your company, contact KRD Wealth Management for a consultation. We can walk you through your options, and help you create a plan that fits your unique goals and situation.
