Exit and Succession Planning

Exit and succession planning should be done after the first dollar of revenue is earned.  Your initial exit plan will be extremely simple, but should evolve over time as your business grows and you get a grasp for where your business is heading.

Exit planning is too often overlooked, with a failure rate of 70-80%.  So, only 2 or 3 out of every 10 businesses put on the market are successfully sold.

Some entrepreneurs hate the idea of planning to leave their company.  But the fact remains that every entrepreneur exits… either voluntarily or involuntarily.  You will either sell your business, pass it on to family or employees, go bankrupt, or die.

As an added benefit, good exit and succession planning increases the value of your business and your ability to impact your business, industry, and community in a positive way by making sure your business does not depend solely on you.  Your future employees and customers will thank you.

Here is an overview of the most common types of business succession.  Please note that you should work closely with an expert in business succession planning to see which is right for you, as every situation is different.

Private Sale of Business

You put your business on the market to sell to an individual, a group of individuals, or another company.  Selling to another company could mean a competitor, someone in your industry but a different market, a vendor, or a private equity group.

Pros: Good if you can find the right buyer, opportunity to facilitate private auction among many buyers, liquidity reward for your hard work building the business, ability to move on to new projects and passions.

Cons: Giving up your “baby”, giving up control of your company

Things to consider: Be very aware of the terms of the purchase, which could affect your ability to collect some or the entire sale price.

Private Partial Sale of Business

You sell a stake in your company and continue to run the business. This provides partial liquidity which allows you to diversify your financial portfolio. You still retain the benefits of business ownership and maintain partial cash flow. Options exist to sell a majority or minority stake in your company. (Often called:  Recapitalization or “Recap”).

Pros: Opportunity to take a “second bite of the apple” where the partial equity you retain grows under new ownership and you sell the small part for bigger than you would have the whole, reduce risk by taking some “chips off the table” but still remain involved with your business

Cons: Some loss of control

Things to consider: Terms of the deal, experience of investor in your industry, look for a good “fit”, not just money

Sell to Employees

Selling to employees can take a few different forms.  If your employees can afford to buy all of your business, it’s a pretty straight-forward deal.  More than likely, full asking price is out of their reach.

You can structure a management buy-out with the help of a financing party.  The financing party provides funding in the form of debt or equity, and also operational assistance and expertise to help the employees continue to be successful.  In this scenario you would get liquidity at close.

You can also consider an ESOP, or Employee Stock Ownership Plan, that vests key employees in business ownership stock in retirement accounts over a period of time.

Pros: Long-term training of new owners, financing parties can take pressure off employees, you get financial reward that does not depend on your employee in cases of buy-out

Cons: Can be difficult to decide value of business when negotiating with your own employees, ESOPS can make the next generation’s transition messy with multiple owners

Family Succession

In this scenario, you gift or sell your business to heirs or other family members.

Pros: Potentially keeps the business going for another generation, gives you the opportunity to train the new owners over a very long period of time

Cons: Value will likely drop in first years after you retire, puts pressure on adult children to perform, could demotivate key management who is not family, could cause family arguments

Things to consider: Tax consequences, helping your family with their own exit planning, and the potential to bring in outside investors to give your family operational expertise and guidance

Liquidation

This occurs when you close the business and walk away.

Pros: Quick and easy if you have little or no remaining operating liabilities such as leases or loans, just close the doors and take your cash home

Cons: No reward for business value, employees and customers left with nothing, you may have been counting on different kind of exit

IPO

An IPO is an Initial Public Offering, in other words, selling a majority of your company’s equity to the public markets.  Between 2008 and 2014 there were only 97 IPOs per year, according to statistics from the University of Florida.