The Six Ways to Exit Your Business

According to Paul Simon, there are 50 Ways to Leave Your Lover, but when it comes to your company, there are only Six Ways to Exit Your Business.

Over the past 24 years, my company, Corporate Finance Associates, and I have been helping business owners exit their businesses. In that time, we have helped (literally) hundreds of sellers sell all or part of their businesses. Virtually all of our selling clients were privately held and more than 75% would be classified as “family operated” enterprises. In each instance, we assisted our clients in exploring all of their exit options; in many cases, we helped them pursue multiple exit strategies in order to increase their odds of a successful exit.

In my last article in ENX Magazine, I mentioned the survey showing 90% of business owners hoped to transfer ownership of their business to their heirs or employees, but less than 75% of business owners surveyed had any specific exit plan outlined. What I have learned during my 24 years in the M&A industry is, while there are a variety of exit methods/plans, we can really boil these down to the aforementioned Six Ways to Exit Your Business.

In this month’s article, I have outlined and explained each of the Six Exit Methods. In future months, I will delve deeper into several of these methods and outline how to actually implement the strategy. I will also discuss how you can determine which exit method is the best for you, based upon your own wishes and desires. For now, let’s take a look at the Six Ways to Exit Your Business:

1. PROCRASTINATOR’S SPECIAL

This is the first and probably easiest way to exit your business. It requires no planning, no preparation, and no responsibility on the part of the owner. What is the “Procrastinator’s Special”? Your plan is to run the business until you die, then let your heirs and/or your/their attorneys sort things out after you are gone. Some liken this method to the old saying about “dying with your boots on.”

With the Procrastinator’s Special, you, the business owner/operation, have no worries and no concerns. Someone else will tend to any exit/transitional problems after you’re gone. This is the simplest exit strategy and works well if you also enjoy leaving decisions up to your attorney after you’re gone.

2. RUN & LIQUIDATE

The second way to exit your business is to decide to run your business until you are ready to retire, then you liquidate the assets of your business and you’re done. This is different from the Procrastinator’s Special since you will actively be involved in the exit process. You run your business for as long as you want. Whenever you are ready to retire, you literally “close the doors” on your operations and sell off the remaining assets of the business.

This is a tried and true method for many businesses, especially those companies which may have no intrinsic sale value and owners without any heirs or key employees interested in the business. You see many small retailers exit their businesses in this manner.

3. SELL IT TO YOUR HEIRS/INSIDERS

Selling your business to your heirs or company “insiders” (generally employees, but not always) is the third way to exit your business, and the first choice for most business owners. When we work with our clients, their first inclination is always to find a way to have their children, siblings, or key employees acquire the business from them.

The best way for this to work is with a great deal of planning and discussion among the shareholders and those they designate to acquire the business from them. Many owners assume their children or employees want to acquire the business, but that isn’t always the case. We have also seen situations where owners looked to sell to outsiders without realizing their kids or employees actually were interested in owning the company. Good, open (and honest) discussions among the owners and their heirs/employees is the key to this process.

Perhaps just as important, both sides have to have a clear vision and agreement on valuation expectations AND the buyers must have the financial wherewithal to acquire the business from the shareholders. Unfortunately, financing the transaction is often a stumbling block to this exit methodology.

4. GIVE IT AWAY

The fourth way to exit your business involves literally giving your business away to your heirs or insiders. Of course, this method only works for business owners who do not need to benefit financially from the transfer of their business and for business owners who have heirs/insiders who want the business and are capable of running it.

Just as with the idea of selling the business to your kids or employees, the most critical component of this process is a detailed discussion with your successors about their true interest and motivation for acquiring the business from you, the owner. Assumptions should never be made; options need to be discussed and ideas and objectives confirmed and validated.

Obviously, the third and fourth exit methods only work in situations where the owners have heirs or key insiders who actually want to acquire the business. If the shareholders have no heirs or key employees who can succeed them and help with the exit, the shareholders must consider options one, two or six.

5. SELL TO AN ESOP

After selling the business to their heirs/employees, selling the company to an ESOP (Employee Stock Ownership Plan) is the second most “preferred” exit for most business owners. Generally speaking, selling to an ESOP is a different process than selling to your kids or employees. There are significant tax advantages for the shareholders to sell the company to an ESOP, but there are also many regulations which must be followed as well. Because of the complexity of ESOPs, my firm, Corporate Finance Associates, has a team who specializes in nothing but ESOP transactions.

What many do not realize is you may set up an ESOP to acquire your business over time, so long as you sell at minimum of 30% of the company to the ESOP on the initial sale. Selling to an ESOP can be a boon for both the shareholders and the employees.

As with the 3rd exit method, selling it to your kids/employees, funding or financing a sale of the business to an ESOP is not a simple matter. Financing options should be considered as early in the process as possible.

6. SELL TO AN OUTSIDER

The sixth and final method for exiting your business is to sell it to an outsider. These are the deals you read about in ENX Magazine or the Wall-Street Journal. This exit strategy involves selling to someone other than family members or employees.

Generally speaking, outside buyers may be divided into three groups: individual acquirers, strategic acquirers and financial buyers. Individual acquirers are buyers who will buy the business and run the company themselves. They may or may not have any relevant industry experience. Generally speaking, individual buyers acquire smaller businesses.

Strategic acquirers are buyers who are already actively involved in the industry or related industry of the company they are acquiring. For example, when Carolina Wholesale acquired Arlington, that was a strategic acquisition. Texas Imaging Systems acquiring Peters & Bauer is another example of a strategic acquisition. Strategic acquirers will make acquisitions of small, mid-size and large companies, but in general, big companies acquire other big companies and small companies acquire other small companies.

Financial acquirers are buyers who may or may not have any experience in the industry. They acquire the business to help it grow so they may resell the business in the future to receive a return on their invested capital. Private Equity Groups like Golden Gate Capital (who acquired Clover Technologies and West Point Products) and CounterPoint Capital (who acquired Parts Now) are examples of financial buyers.

Generally speaking, financial buyers are most interested in profitability and growth. They use leverage (bank debt) along with investor capital to complete their transactions. Also generally speaking, financial buyers are not interested in running the company and require the selling company to have a good management team who will remain to run the business after a sale. Most financial buyers look to acquire companies who have at least $2 million in profits.

That’s it, the Six Ways to Exit Your Business. There may be other methods, but based on our experience, those are just variations of these Six Ways. As previously mentioned, future articles will delve deeper into these exit methods to help you determine which option(s) is best for you given your specific situation. At the end of the day, not all of these exit strategies will work for every business, but we always suggest our clients consider all of them before settling on their preferred strategy.

Jim Zipursky
About the Author
Jim Zipursky is the Managing Director of CFA-MidWest, an investment bank serving the middle market. Jim is a registered representative of Silver Oak Securities, Inc., member FINRA/SIPC. For more information visit www.cfaw.com/omaha. Follow Jim on Twitter (@jazcfane) for articles and information about M&A. For more information about Exit Strategies or Selling Your Business, feel free to contact Jim at (402) 330-2160 or jaz@cfaomaha.com.