Navigating the Exit: A Strategic Guide for Business Owners

Read the full blog below to learn more.

  • There are several methods by which a business owner can divest their stake
  • By weighing all exit options and understanding what’s important to you, careful assessment and planning can result in the ideal transition
  • A team of professionals helps throughout the process and a focus on your retirement goals is key

Building a business from the ground up, running it efficiently day-in and day-out, managing through industry ups and downs, learning more as you go. These are areas skilled entrepreneurs are well versed in. You might even mentor younger colleagues on how to become a successful firm owner.

Exit planning, though, is a realm so many businesses neglect, leaving the door open to risk and possible downfall. Few people enjoy strategizing the end game, or at least setting up a smooth transition to the next generation of leaders, but it’s paramount to increasing your net worth and reducing stress before and during your retirement.

What Is an Exit Plan?

An exit plan comes in many forms. At a high level, it is a roadmap of how to monetize business ownership into personal wealth. It’s a challenge handling an illiquid asset along with weighing all financial strategies possible, but we also must consider the emotional side of the equation – what matters most to you and your family? What’s your plan after you leave your office or worksite for the last time? Moving on to the next chapter of your life requires weighing a myriad of factors.

A well-constructed exit plan considers the goals and intentions of the business owners and all current and future stakeholders. Of course, a careful assessment of the firm’s valuation today and in the future must be maintained and fine-tuned as a target sale date nears. A sound exit plan is also a to-do list – action items include what can be done in the near term to enhance long-term value. Moreover, taking steps to remove potential potholes on the journey to a smooth transition is time well spent.

Finally, no comprehensive exit plan is complete without a review of all exit pathways including selling to family, organizing a buyout from the management team, finding a strategic or financial buyer, forming an Employee Stock Ownership Plan (ESOP), or even going public through an Initial Public Offering (IPO).

Talking Numbers

Personal financial planning often taps into the emotional side of money. That area is no doubt important, but business exit planning strategies are usually more numbers-based and require a team of seasoned professionals – attorneys, accountants, and business strategists. Not to say they are all cold-hearted suits, but going at this objectively is critical. The optimal deal structure might be a stair-step approach whereby multiple liquidity events occur – experienced bankers help make this happen.

No matter the approach taken, reducing the tax burden is a universal priority we see among for-profit enterprises. This is where financial planning activities are crucial to maximizing value when transitioning a business from being your biggest asset to part of your personal liquid wealth to fund your retirement. Ultimately, we must determine an after-tax dollar figure to target in the monetization process – goals-based financial planning helps pin that down.

It’s a Process

Creating an exit plan assessment addresses the many issues mentioned above. Periodically updating the plan also helps save time later when the firm is more complex and your retirement date approaches. What’s more, maintaining an exit plan results in you and other executives thinking strategically. Let’s review some of the most popular options. Familiarizing yourself with each strategy can guide you toward determining the optimal fit for your firm’s succession strategy.

1.      Selling to family

Many owners want the business to live on through the next generation. You may have employed children and brought in other family members to help grow the business. There are a few ways we can maximize value here. Under this scenario, a deal is structured as either a sale or gift to maximize tax advantages and your future income. While there are financing challenges and an immediate payout might not happen, you can maintain some control and leave a legacy at the same time.

2.      A management buyout

Another method that works if you want to have some say in how the business operates going forward and are willing to accept a gradual payout is via a management buyout. An exit strategy that negotiates with a selected professional team can thoughtfully arrive at the right price and deal terms that meet your needs and are suitable for the up-and-coming owners. Once again, financing can be tricky, and your ultimate cash inflows might be dependent on the company’s ongoing success.

3.      Identifying a strategic or financial buyer

Among the most lucrative withdrawal options is finding the right strategic buyer. Such a person or entity may be willing to pay a significant premium based on where they want to take the company. So, if maximizing the sale price and getting immediate liquidity are priorities, then your focus should be on finding the right-fitting strategic buyer. Another advantage of this strategy is that the new ownership team might share your interest in seeing the business thrive and enjoy long-term success. The downside is that significant changes commonly occur, including layoffs of existing employees and retooling operations which may displease you.

While a strategic buyer usually results in the former owner having little say in how the business operates, a financial buyer is suitable if you want to remain involved in the day-to-day while still building value for an eventual exit. Financial buyers are like partners in improving how the business runs and increasing its value, though they will typically only pay fair market value since they do not have a strategic use for the asset. You should also consider the impacts on the company’s workforce, and the onus is on you to continue managing the business until the final exit.

4.      Establishing an ESOP

An Employee Stock Ownership Plan puts existing and future employees in charge to an extent. It’s an option you should consider if leaving a legacy and rewarding your workers are priorities. An ESOP offers an incentive for employees at any time in a business’s life, and it can help you liquidate your ownership share over time. Additionally, there are tax advantages, though compliance requirements are many.

5.      IPO

An Initial Public Offering is a potential exit only for large firms – usually those with $100 million-plus in annual revenue. Made famous by financial TV and mega success stories, an IPO has perhaps the most possible financial upside. High enough market demand and the right team of investment bankers can take your business on a roadshow, building a book of would-be buyers. Employee stock options might turn highly valuable (and liquid), but pre-IPO owners also face lock-up periods in which they are restricted from selling. Of course, company data is made public and there are steep regulatory and reporting requirements.

The Bottom Line

Getting started with forming an exit plan might be the most valuable action item for you right now. While there are five strategies listed, an approach that combines more than one exit strategy could be the right way to fit your business and retirement priorities. No matter the route, developing an exit plan for your business is imperative for risk management and earning the highest return on your biggest investment.