Exit Strategy

How to Structure the Exit Strategy Transaction

Exit Planning

To position your business exit for success, you must understand the implications and importance of alternative transaction structures that can help maximize transaction value. There are many ways to transfer ownership; the most common are sales or transfers of ownership within the family or employee group and sales to a third party. Other options include minority sales and recapitalizations, variations that can allow for retention of partial ownership or management control, as well as IPOs (initial public offerings) and MBOs (management buy-outs).

Selling or passing control within your family

Many owners want to see family members or other heirs enjoy the fruits of their labor. But, non-family managers and employees can be suspicious of plans to transfer management control to a family member, and often family members who are not actively involved in the business will voice objections as well. Key employees and family members alike may have concerns about who controls the business. The earlier and more openly you consider these issues, the greater the likelihood of a satisfactory resolution.

Selling to a partner or co-owner

When partners or co-owners buy or start a business, ownership agreements usually include restrictions regarding the circumstances of transfer such as only by gift or at death; the potential transferees such as only the entity itself, family members or other existing owners of the business; the transfer price which is usually of formula approach or independent expert valuation. These restrictions are often coupled with a right of first refusal in the hands of the co-owners or the company.

Selling to employees, management buy-out (MBOs)

Sometimes the logical successor is an existing employee or group of employees. Where certain employees are key to the business or closely involved in day-to-day operations, you must take steps to ensure that these people want to remain in the business after you’ve gone. If they leave, the value could be significantly affected.

Sale to a third party

The simplest way to transfer ownership is through a sale to an outside party. Sales to larger companies are common as are sales to private equity buyers. This option creates an opportunity to diversity a concentration of wealth in the business. However, the outside sale of assets or stock can have complications and unintended consequences. In the context of a family business, the family may lose its identity or be unable to find a career path for family members associated with the business. A sale to outsiders may also change relationships with key employees, vendors and customers.

Initial public offerings (IPOs)

The expression ‘going public’ describes the process of offering securities, common or preferred stock or bonds, of a private company to the general public. This is often considered when the funding required to meet business growth has exceeded its debt capacity. Under the right circumstances, going public can be very attractive, but the costs are significant, and there is often a misconception about the amount of control that can be retained. The decision to list requires in-depth analysis, and its advantages and disadvantages must be weighed carefully.

Note: this article was originally published at http://www.poewolfpartners.com. Follow Renita on Twitter: @RenitaWolf.

1 reply
  1. John Marshall says:

    Great succinct post on some of the big issues involved with exit planning. I had an experience selling to a co-owner which was less than satisfactory because we did not use an outside evaluator.



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