Are you a business owner thinking about exiting your company?
Which exit strategy will benefit you most? It’s a tough move to
undo, and you should know the pluses and minuses going in.
While the number of exit routes seems unending, you generally
choose from one of the following:
Transfer the company to a family member
Sell the business to one or more key employees
Sell to employees using an employee stock ownership plan
Sell to one or more co-owners
Sell to an outside third party
Engage in an initial public offering
Become a passive owner
While your emotions
during the exit process
can be overwhelming at
times, your decision making
can be relatively
straightforward, so long as
you keep the end in mind
and do some up-front
Planning early is key
First, establish personal and financial objectives to identify the best buyers of
your business. Second, determine the value of your company. Finally, evaluate
tax consequences of each exit path.
Let’s explore these eight exit strategies.
1. Transfer to a family member. Owners usually consider transferring businesses
to family members for non-financial reasons. Among the advantages, this
transfers the company to a known entity, provides for the well-being of your
family, perpetuates your company’s mission or culture, and allows you to
remain involved in the business.
The disadvantages include:
little or no cash from closing available for retirement
increased (and continued) financial risk
required owner involvement in company post-closing
children’s inability or unwillingness to assume the ownership role
the family issues that surround treating all children fairly or equally
2. Transfer to key employee(s). With this type of transfer, you hope to achieve
the same objectives as when transferring the business to a family member, with
the added goal of achieving financial security (albeit potentially over time). Disadvantages of this route resemble those in family transfers and include
employees’ possible inability or unwillingness to assume ownership.
3. Transfer via ESOP. These qualified retirement plans must invest primarily in the
stock of the sponsoring employer. In addition to the advantages of a standard
transfer to key employees, you enjoy tax benefits as well as cash at closing. Again though, not all aspects of this route benefit you. ESOPs are costly and
complex, offer limited company growth due to the borrowing necessary to buy
the owner’s stock, net less than full value at closing compared with third-party
sales, and use company assets as collateral.
4. Sale to co-owners. Advantages again resemble those of transferring your business to a family member. Disadvantages include the need to typically take back an installment note for a substantial part of the purchase price and, as in other avenues, increased financial risk, owner involvement past closing, and normally netting less than full fair market value.
5. Sale to a third party. This generally offers your best chance at receiving the maximum purchase price for your company and the maximum amount of cash at closing. This route appeals to owners intending to leave after they sell and to owners who want to propel the business to the next level with someone else’s financial support. It also allows you to control your date of departure.
potential loss of your personal identity as the business owner
potential loss of your corporate culture and mission
potential detriment to employees if you sell to a party that seeks
part of the purchase price may be subject to future performance of the company after the sale
6. IPO. This route offers high valuation and cash for the business. Unfortunately, an IPO comes with significant disadvantages — just ask Elon Musk of Tesla. Your company needs to be worth over $250 million in order for the IPO route to be considered an appropriate exit option.
The disadvantages of this route are primarily:
limited liquidity at closing
not a full exit at closing
loss of full control
additional reporting and fiduciary requirements
7. Passive ownership. This attracts owners who wish to maintain control,
become less active in the company, and preserve the company culture and
mission. Your disadvantages stem from you never being able to permanently
leave the business, you receive little or no cash when you leave active
employment, and you continue to carry the risk associated with ownership.
8. Liquidation. Only one situation justifies this route: You want, or need, to leave
the company immediately and have no alternative exit strategies.Liquidation
offers speed and cash, but can bring enormous disadvantages:
yields less cash than any other exit route
comes with a higher tax burden than any other type of sale/transfer and
has a potentially devastating effect on employees and customers
Consult your financial advisor
Synovus is available to offer guidance, examples, and market
perspectives as well as help you carefully compare each
path in relation to your final objectives.
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