Do You Have an Exit Plan?

Options for Exiting Your Business

For business owners, managing a successful exit is the single most important event in a company’s historical growth and maturity.

Exit planning is the process of preparing for the future ownership transfer of your company to others. A well-thought-out exit plan with written goals, values, and objectives is indispensable to the transfer of the company and achievement of the shareholder's long-term goals. 

If you’re considering how to exit your business, you have a limited number of options to consider. Here are the most common exit strategies for private company owners to consider:

  1. Sell to a third party, either an individual buyer or strategic buyer.
  2. Sell your business to one or more key employees.
  3. Sell to your employees (ESOP).
  4. Bring in an outside investor and keep a minority interest.
  5. Sell or give your business to a family member.
  6. Hire a management team to take over and become a passive owner.
  7. Go public.
  8. Liquidate your business.

Determining which option is the best fit is a challenge many business owners put off until it’s too late. If you’d like to leave your business on your terms and on your timetable, you need to be proactive about understanding your exit options.

We recommend that you create a Strategic Exit Plan which involves
asking yourself a number of questions to determine which exit option is best for you. Your exit options should be consistent with your personal goals and take into account the realities of your company and the marketplace.

Exit Planning Process

Step 1: Clearly define your personal goals.

Identify your most important objectives, both in terms of financial goals (“How much money do I need from the exit to ensure my family’s financial security?”) and non-financial goals (“I want the company to stay in my family,” or “I want to my key employees to be
rewarded during the exit”).

Establishing well-defined and written objectives is the first step in the exit planning process. Doing so in advance of your exit gives you and your advisors the time necessary to make your goals a reality.

Step 2: Validate that your goals are consistent.

With the help of your advisors, determine whether your goals are consistent with each other. Very often this is not the case. For example, many business owners want to receive all cash at closing
when they exit their business. At the same time the owner may want to transfer the business to a family member or a key employee.

Unfortunately, these two goals may be mutually exclusive. Family members and key employees often do not have sufficient capital to structure a transaction this way. A great deal of stress and heartache can be avoided by addressing these kinds of issues early in the process.

Step 3: Understand the value of your business and its salability.

Once you have defined a set of consistent objectives, you need to understand the market value and salability of your company. This analysis will provide you with further direction and can eliminate certain unfavorable exit options.

For example, if the value of your company is below what you feel you need to support a comfortable lifestyle after your exit, you may decide to take some time to enhance its value or to do further financial planning to ensure you clearly understand your financial needs.

Value and salability are not always the same. Salability determines how quickly a business will sell and how much leverage a business owner will have when negotiating with a buyer. Salability depends to a large extent on external market conditions out of your direct control.  For example, the option of selling your business for cash to an outside buyer may be eliminated because of a downturn in your business or industry.

RMS and Company can help you determine your company’s value and salability. Because we are actively involved in transactions and talking with buyers we can provide an accurate assessment of the marketplace and a real world sense of the value and salability of your
company.

Step 4: Consider and Understand Tax and Legal Implications.

The final step in determining the best exit path for you is to evaluate the tax and legal consequences of the exit options available to you. This evaluation includes factors such as the legal structure of your business entity, how its ownership is structured, exiting legal agreements, as well as any changes that must be made.

For example, if a transaction involves a sale of assets and the company is a "C" corporation, there would be significant adverse tax consequences. Good advice from your CPA and attorney can help minimize the taxes you would otherwise have to pay.