Business Exit Planning: 5 Classic Strategies + One You May Have Missed

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Jun 08, 2021
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Most business owners recognize the value of planning for building and growing a successful company.

It takes entrepreneurial thinking and strong problem-solving skills to start and grow a business, and your exit — whether for retirement or another reason — is just as important a phase in the lifecycle of your company.

As a business owner, your exit strategy plan matters not only to you and your family, but also to your employees, customers, vendors, strategic partners, and the community at large.

Some entrepreneurs include an exit strategy in their initial business plan. That’s a great idea, but it’s also vital to recognize when conditions change and other options may become more beneficial.

Creating an exit strategy business plan well in advance can give you the advantage of clarity in the planning process as you make strategic choices that can strengthen your position for a sale, merger, or other deal.

The Exit Strategy Business Plan: Who Needs One? 

In short, every business owner should plan and articulate an exit strategy. Every company is unique, and different entrepreneurs make their exits for different reasons — whether for retirement, to start a new business, to become an employee elsewhere, or for reasons involving health or other personal concerns.

The primary concern most entrepreneurs have at the end of their involvement is how to get the best return on their investment, especially in the case of a lifelong investment of capital, time, and hard work. But there are other concerns and expectations to consider, including:

  • Liquidity needs and financial goals
  • Company market value
  • Level and timeline for continued involvement
  • Business continuity
  • How much interest in the business to sell
  • Likely interested buyers
  • And more

Most exit strategies involve selling the business. Because that can be a complex and time-intensive process, it’s all the more important to start planning your exit strategy well in advance of the need for one.

 

Comparing Exit Plans: Which is Best?

The best business owner’s exit strategy is the one that best meets your objectives, so it’s important to make an honest assessment of your needs, expectations, and most important considerations for your exit plan. While some owners are solely focused on cashing out, others may have a greater interest in controlling the transition, or leaving the legacy of a healthy business behind, for the benefit of their employees and community.

It’s also true that the complexities of some exit strategies simply aren’t suited to all companies. Options like initial public offerings (IPOs), mergers, acquisitions, and even standard third-party sales can be time-consuming and incredibly stressful on not only business owners but also employees and their families. So it’s important to take all sides of the decision into consideration.

RELATED: Expert Advice: How to Sell Your Small Business in 6 Clear Steps [Checklist]

With that in mind, this article compares five common business exit strategies for company owners — plus a less common, but growing, way to sell your business, control your exit, and leave behind a positive legacy.

 

1. The “Lifestyle Company” Exit Strategy

Company owners who choose this option essentially wind their business down slowly and close the business when the owner decides, or when it becomes no longer profitable. At that time, assets are sold, debts are paid, and the margin goes to the owner.

On paper, liquidating your business may look like the simplest approach, but it can be fraught for other reasons, considering that employees will eventually lose their jobs, vendors lose business, and a community may lose an important employer.

 

2. Third-Party Sale Business Exit Strategy

Many entrepreneurs attempt a third-party sale — especially those owners without a successor, whether family or a trusted member of leadership who wants to take over.

Third-party sales rely on a healthy open market. That means economic downturns, a glut of business owners facing retirement (such as today’s baby boomers), or other unforeseen events can complicate the process of finding a buyer and negotiating a sale on your desired terms. In fact, most businesses that put themselves up for third-party sale don’t end up successfully sold.

 

3. IPO Exit Strategy

Everyone is familiar with the big, flashy IPOs that make the news, making instant millionaires out of some business owners.

But is an IPO an option for selling your business? Maybe.

Going public can be a solid option for larger companies that can provide detailed, clear recordkeeping and accounting information to illustrate company value to potential institutional investors. This requires significant reporting, transparency, and regulatory requirements.

An IPO can involve extended timelines and complications for accessing cash from the sale. They can lead to corporate reorganization, and they can be expensive to transact.

 

 4. Merger or Acquisition Exit Plan

Mergers and acquisitions (M&A) are just what they sound like: In a merger, two or more companies combine to become a single business entity. In an acquisition, a company buys another company outright.

There are many different types of mergers, and acquisitions can involve buyers that range from a competitor to a strategic partner to an outside investor or holding company. Depending on the acquiring buyer’s strategy, it’s possible for the business owner who’s selling to realize a much higher price for the business than with some other exit strategies.

But it’s also true that many M&A deals fall apart, and future success rates of businesses post-M&A are not historically very good. So, for the owner looking to leave a legacy for employees and the community, M&A can be a tricky decision.

 

5. Friendly Buyout Business Exit Strategy

What is a friendly business buyout? It’s often the sale of the company to a family member or members, or to key management employee(s) who want to take over ownership and run the business. Friendly buyouts can allow time for succession planning, can be structured over time in ways that are more beneficial to the seller, and they can lead to effective transitions that provide continuity for employees. 

That said, financial dealings with family members or close associates can be fraught. It’s possible that buyers may have trouble securing the capital needed for purchase, and emotional situations between family members or friends could lead an owner to undervalue the business.

 

6. Employee Stock Ownership Plan (ESOP)

An ESOP provides another way an owner can sell all or part of a business, and establish employee ownership of that portion (or the whole). In this exit strategy, the company sets up an ESOP trust, which becomes the legal entity that holds company shares on employees’ behalf.

The ESOP exit strategy provides liquidity to the seller, as well as significant tax savings, because the ESOP shareholder is a tax-exempt entity. These tax advantages can support a healthy cash flow for the business during the ownership transition.

Another important ESOP advantage is the owner’s ability to control their exit over time. That reduces uncertainty, and some of the stress of the transition. It also allows business owners to oversee management succession planning, helping to strengthen and support the company culture moving forward. In addition, business owners can feel good about creating an attractive qualified retirement benefit for employees, which can help the company meet its recruiting and retention goals.

At the same time, an ESOP sale can be complex and is subject to specific regulations. So it may require working with a specialized advisor to ensure correct valuation and full regulatory compliance.

RELATED: ESOP vs ESPP: How Do These Employee Stock Benefit Plans Differ?

 

Choosing the Right Exit Strategy for You & Your Company

Getting your business exit planning strategy right is absolutely vital, not only to you but also to your employees and their families, as well as your customers, strategic vendor partners, and your community.

That’s why it’s essential to consider all your business sale options, and their pros and cons, in detail. You can get more information on all six of these exit strategies when you download the ebook, Your Ultimate Guide to Business Exit Strategies: Top Succession Plans for Owners. Just click the link below to get your copy.

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Topics: Business Exit Strategy, Business Succession Planning, Retirement

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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