8 Business Exit Options
There are a variety of strategies to consider when planning a business exit. Here are some of the pros and cons of the eight most common internal and external options. The right exit strategy for a particular business depends largely on the individual needs of the business owner and the current state of the business.
- Intergenerational Transfer. Transferring ownership to a family member is a popular option for the preservation of an owner’s legacy and to provide opportunity for the next generation of family members to take over the business. Pros include lower costs, more control over the process, reduced disruption and high buyer/seller motivation. Cons of this strategy could include a lower overall sales price, a disruption in family dynamics, lack of funds/an illiquid buyer and the risk of flight by key employees.
- Management Buyout. In this type of transfer, the owner sells all or part of the business to the company’s management team. Management typically uses the assets of the business to finance a significant portion of the purchase price. This route provides highly motivated buyers, the preservation of human capital and continuity. Disadvantages may include potential management “sandbagging,” heavy seller financing, managers who may not be entrepreneurial and a threat of flight (coercion of owner).
- Sale to Existing Partners. In this scenario, success is closely linked to the existence and quality of a buy-sell agreement. This has the advantage of being planned and less disruptive. This type of sale is controlled and has well-informed buyers. On the downside, this may yield a lower sales price and slower payment terms. Competency gaps and restrictions baked into the agreement are also considerations.
- Employee Stock Option Plan (ESOP). This is a common vehicle for gradually transitioning a business to employees over time. This often prompts employees to think more like owners and can be used for attraction and retention. The business stays in the “family” and they have favorable tax treatment. However, it can be complicated, expensive and compel the company to buy back shares from departing employees.
- Sale to a Third Party. In this type of transfer, the business is sold to a strategic buyer, financial buyer or private equity group through a negotiated sale, controlled auction or unsolicited offer. Advantages include a higher sales price, more cash up front, stability in deal terms and overall cost-effectiveness. It can also inject renewed energy into the business. However, the process is long (nine to 12 months). There can also be privacy concerns and it can be emotional, complex and often include post-sale tie-downs.
- Recapitalization. This method basically finds new ways to “fund the company’s balance sheet” by bringing in a lender or equity investor to act as a partner in the business. Under this option, one can sell a minority or majority position, allowing for a partial exit and the ability to “take a second bite of the apple” later. It can also be used in conjunction with other exit options. However, the transaction can be slow, expensive relative to its benefit and there is a continuing accountability to partners along with a loss of control.
- Orderly Liquidation. In this process, a business is shut down relatively simply and quickly. It can make sense if asset values exceed the ability of the business to produce the income required to support it as an investment (going concern). It can be efficient and less expensive than other exit options. Nonetheless, the proceeds are typically uncertain, there is no goodwill value, it is emotional, it damages employees and jobs, it often carries a stigma and taxes may be higher, particularly for C corporations.
- Taking the Business Public (IPO). This is an option for some business owners. It can be a way to maximize their return on investment and receive a large payout by allowing the company to access capital from public investors. However, going public can be a long, complex and costly process, possibly resulting in the owner relinquishing control of the business.
There are a variety of business exit options available, even beyond the ones covered in this article. The right option for a particular business depends on the individual needs of the business owner and the current state of the business.
Eric S. Degen
Eric L. Degen, CPA, CGMA, CEPA, LPBC, CMEC, is a principal at TITAN Business Development Group, LLC. He is a member of the NJCPA.
This article appeared in the Summer 2023 issue of New Jersey CPA magazine. Read the full issue.