Exploring 5 Major Exit Options
Even if the thought of an “exit” may be years away, planning in advance is crucial to set the course for the future of your business, your finances and your personal legacy. Your exit plan should align your personal and professional desires and take into account both the financial and emotional factors at play.
Ask yourself:
- Do I want to ensure my organization’s legacy continues?
- Do I want a maximum liquidity event?
- Do I want to simply step back from day-to-day tasks while maintaining involvement?
There are many more options to consider and decisions to make than you’re likely aware of now. Being intentional about creating a written plan that creates clarity and guides the steps you should take throughout your journey is one of the key differences we see between those who achieve their desired goals and those who don’t.
A recent study found that simply developing a written plan gives you a 42% greater chance of achieving your desired outcome.1
Without a plan, it may be more challenging to align your actions with your end goal. Companies that are growing rapidly and have high valuations often demonstrate a strong focus on their strategies.
Why Visualizing the End Matters
Becoming educated on your options drives how you build, grow and eventually transition out of your business. By identifying your preferred exit option early (even years in advance), you create a crystal-clear focus for the future that you’re building. This clarity allows you to align your strategy and actions with your goals, helping to ensure your hard work turns into value when it’s time for your next chapter. Furthermore, knowing your options helps you pivot when necessary while staying true to your end goals.
The 5 Major Exit Options
Acquisition Entrepreneur
This first option involves selling your business to an acquisition entrepreneur or investor seeking ownership of an established company. These buyers may be seasoned investors looking to diversity or add to their existing portfolio, or they may be high-net-worth W-2 employees looking to leave or transition out of the corporate world.
This type of buyer is often new to the industry or business and may fund the transaction through a mix of personal funds, seller financing or loans. This transaction will have a heightened review of the valuation and be heavily focused on cash flow. The buyer’s skills and experience will greatly impact the long-term success of the deal.
While this type of transaction can bring in new blood, flexible terms and a higher potential sale price than internal transitions, concerns include employee and client turnover and carryover of company culture. Additionally, exits of this nature can take a while, as it can take a long time to not only find the right buyer but also negotiate the terms.
Trusted Individual
This option involves selling the ownership of your business to trusted individual(s), such as family members, business partners or key employees. This option, on the surface, is usually less disruptive and helps to ensure continuity by keeping the business under a familiar leadership style and culture.
This type of sale is typically funded by the business’s cash flow or a structured payment plan, and the transition is often slower and more gradual, allowing the potential for greater continuity, less disruption and less worry within the workforce. One disadvantage of a trusted transfer is that it often yields a lower sale price than other options. Another is that the buyer may have funding challenges, leading to great financial and emotional strain.
Strategic Buyer
A company within your industry, your geography or a related market can have a huge appetite to expand market share, gain talent or leverage the skill sets of your workforce. These buyers are extremely motivated and generally playing a much larger game, which could potentially influence the price.
The buyer in these situations is typically very familiar with your type of organization and will often integrate your business into its existing operations. While a higher sale price and longevity are advantages of this type of sale, the loss of independence, the impact on your existing teammates and your legacy are things to consider, as in most cases everything you’ve built will be now marketed and named under the new ownership.
Employee Stock Ownership Plan (ESOP)
An ESOP is perhaps the most common option most leaders seek to explore during initial planning conversations. ESOPs involve selling some or all your shares to the ESOP, allowing employees to acquire ownership of the business. ESOPs seem to increase and decrease in popularity in cycles, and when executed successfully they give a greater incentive to employes to continue the legacy and preserve what’s been built.
An ESOP can be a great strategy for owners who want to defer or avoid capital gains. Employee retention generally increases with an ESOP, as employees are more vested in the company’s success. Additionally, you get to remain involved with the organization. A downside of ESOPs is their feasibility, as many businesses just can’t make the numbers work. Furthermore, while you’ll experience legal and professional services costs with every option, the costs of standing up an ESOP are going to the highest. This option also may not offer you as high a sales price as other options.
Private Equity
This type of exit involves selling all or part of your organization to a private equity (PE) company. These firms typically look for opportunities to increase businesses performance through operational improvements, strategy, talent, systems and processes.
There are two major strategies with PE transactions. Some PE firms are looking to diversify their portfolio, and you may be the first type of business they’ll own. Others often use a roll-up strategy, where they buy many companies like yours and aim to enhance the areas listed above with the goal of achieving a higher valuation. Access to capital is often the biggest relief for owners and leaders that pursue this path. However, potential downsides can include a loss of control when it comes to decision-making and the requirement to stay on for a period of time.
Planning for Your Personal Situation
Our advice, regardless of whether you’re ready to sell, is that you should get as educated as you can about what exit options you might have someday. You’ll want to decide which of the options discussed above might be best for you (and, perhaps even more importantly, which ones you can eliminate from contention).
Going through this journey can take years, and your answer may change during different stages of the company’s development or during various stages of your life. This isn’t something you need to go through alone, and you don’t need to be an expert in everything. Whether you wish to grow, acquire or exit, the companies we look up to or aspire to be like surround themselves with a team of trusted advisors who “get it” and are best-in-class when it comes to helping them execute on their goal.
Putting down your goal in writing and having regular review meetings to help ensure accountability will improve your chances of success to more than 95%.2 Planning in advance with the right team of advisors can assist in attracting potential buyers. Regardless of which path you may take, preparation is the key difference.
At Creative Planning Business Services, our teams have extensive experience guiding clients through complex business transitions. Contact us to learn more about how we can help with your business succession planning.
