Nine Ways to Leave Your Business
In the last issue (#17), we highlighted some of the differences between Small Businesses vs. Middle Market Businesses. This issue will discuss 9 Ways to Leave Your Business.
"Look for your choices, pick the best one, then go with it." Pat Riley
Nine Ways to Leave Your Business
Selling your business is not the only way to leave your business. There are other options of which you should be aware. In the list that follows, depending on the nature, size and profitability of your business, some methods may not be achievable. After reviewing the list, you’ll see that some exit options are more desirable than others. In future issues we will discuss types of buyers for the “sell your business” option in greater detail.
Before embarking on the sale of your business, you should understand your nine exit options.
1) Sell your business
Possible buyers include co-owners, family members, friends, individual buyers, a single employee, a management buyout (MBO), a management-led leveraged buyout (LBO), an Employee Stock Ownership Plan (ESOP), larger corporations (strategic acquisitions), private equity groups (PEGS) or private investment groups (PIGS) (also known as financial buyers), customers, suppliers, and competitors.
2) Gift your business ownership
Possible recipients include family members, friends, employees, or charitable organizations. The tax implications of gifting your business are very complex and may require a considerable amount of time to plan the transition of your business through gifting. If this is your chosen method of exit, start planning many years in advance of your desired exit date.
3) Hire a manager for the business and become a passive owner
In this situation you would still own the business; this is really a quasi-exit option. Obviously, unless you fund the business out of your own savings, the business needs to generate enough cash flow to allow you to hire a qualified manager, enabling you to step away from the business to the extent that you desire.
4) Liquidate the assets
If your business cannot be sold as a going concern for more than the value of your hard assets, liquidating the saleable assets through auction is one method of generating funds. However, any sales proceeds must pay off the debts of the business before you can be paid. This is one of the least desirable exit options and is the price many business owners pay for their failure to adequately plan their business exit.
5) Close up shop
If the business cannot be sold as a going concern and does not have any assets of real value, and the business does not have other obligations in the form of debts, leases, etc., an owner can just close the business and walk away. Or, if corporate obligations exist, those obligations can be transferred to the owner personally.
6) Bankruptcy
If the value of the business, whether as a going concern or its asset liquidation value, is significantly less than the company’s obligations, declaring bankruptcy might be an exit option. Bankruptcy laws are complex and you should seek the advice of professional advisors if you are considering this alternative.
7) Merger
This occurs when two companies combine their operations into a newly created third entity. This is different than a strategic acquisition whereby a larger business acquires a smaller firm and integrates the smaller company’s operation into the larger company’s operations. A merger may not provide an immediate “cash-out”, but instead provides ownership in the newly created corporation. Although possible, mergers of small businesses are unusual.
8) Recapitalization
If you are interested in achieving some liquidity by selling partial ownership of the business, but retaining a minority interest and staying on for several years to help it grow, recapitalization may be an exit option. Investors, primarily private equity groups (PEGs), are interested in well-run businesses with significant growth potential. They are looking for strong ownership, an experienced management team and firms that have consistent and strong profitability. PEGs can provide expertise, new ideas and access to additional capital to facilitate growth. If the business value increases, as a PEG hopes, the business owner benefits at the time of the ultimate disposition of the business to the extent of his retained minority interest. Because of the size of the businesses we are targeting, for most readers of this newsletter recapitalization is probably not an option. But for those who might qualify, it is worth investigating further.
9) Going public
For readers of this newsletter, due to sheer size and growth considerations, an initial public offering, or IPO, is highly unlikely. Participation in the previous option, recapitalization, might ultimately lead to the possibility of investors in your business pursuing a final exit strategy by “going public.”
Although not included in this list, death is an unplanned exit that occurs for far too many owners. If the owner has not developed a contingency plan to deal with that possibility, the distressed family will often have to settle for the less desirable options to dispose of the business.
"The indispensable first step to getting the things you want out of life is this: decide what you want." Ben Stein
Overcome the Power of Inertia
Overcome the Power of Inertia and call a business broker for a free consultation. Many brokers offer no-charge, no-obligation evaluations of small businesses. They can provide a broker opinion of value and help you identify obstacles to a successful sale as well as opportunities for improvement to increase the value of your business. That is a great way to start planning for a successful and profitable exit from your business.
