At some point you’re going to leave your business. Hopefully, when you leave, it’ll be on your terms. Understanding your options well before you leave helps you get a better outcome.
How you leave your business is part of what we call the exit planning process. It is a process and not an event. The steps to an exit process often include the following:
- Knowing whether you can financially afford to leave your business.
- Knowing whether you are mentally ready to leave your business.
- Understanding what the business is worth to different buyers.
- Knowing what the options are for transfer methods for your business.
- Increasing the value of the business for you and a successor owner.
- Using passive ownership strategies as a way to test your ideas about leaving your business.
- Understanding the likely successful transfer method of your business.
- Finding a successor owner for the business. (Or hopefully more than one successor.)
- Going through the actual transfer process.
- Investing your proceeds.
- Planning for your family and yourself as an ex-business owner.
- Estate and legacy planning.
These 12 steps often take several years to accomplish. There is no rush and many people who begin an exit process will pause at different steps, sometimes for years.
The following methods are things we believe are the best ways for leaving your business.
Sell to an outsider?
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 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 a competitor (whom you may 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. Most business owners have never identified what the intellectual property is in their business and have never commercialized that intellectual property. For those businesses who have taken this step, they will often get very high multiples of sales as a purchase price. The intellectual capital buyer is more interested in what they can do with the intelligence held within the company than with the actual cash flow from the company.
Sell to existing managers?
You can transfer your business to your managers. This 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 they rarely have enough money. This means the selling owner will be holding paper (or being the bank) for the sale. When such sale is done, we recommend having the owner stay involved in the business until the note is paid off.
Many sellers will look at an employee stock ownership plan (ESOP) as a way to structure a sale to managers. The seller can receive preferential tax treatment and all the employees become successor owners of the company.
Sell to your kids?
You can transfer your business to your children. But today, we’re seeing fewer 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.
I recommend that a business be 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).
An important thing to test before doing a transfer to your children is whether they have the ability to run the business. I have had the unfortunate experience of telling parents their children are not able to run the business. This is not a happy day for either the parents or the children.