Thinking Ahead to Your Exit Strategy

It takes so much time, energy and creativity to start and run your own business, it’s no wonder that many owners haven’t given much thought to what happens when the time comes to sell it. But at some point, chances are, you will need to think about your strategy for leaving your company. Business owners have several options for cashing out, and familiarizing yourself with the alternatives and the process  involved in selling your business will help prepare you for that day. Understanding your options will also help you frame your corporate strategy in anticipation of an eventual sale.

Business owners decide to sell for all sorts of reasons. Probably the most common is a desire to retire. Other times, a business owner or CEO might have health issues that create significant concerns at the company. In a small business, this effect is multiplied because a small business owner is usually involved in almost all aspects of the operation. Sometimes companies for sale are having trouble addressing current business challenges. Small businesses are typically constrained by a lack of capital and limited management resources, and owners may need to sell all or a portion of the company in order to confront difficulties.

Identify Your Exit Objectives

Whatever the reason for wanting to sell, small business owners need to take time to identify the goals they’d like to achieve in a sale. Although most sellers would claim that their goals are strictly financial, we have seen that owners often have less obvious but no less important objectives in the sale of a business.

Finances, of course, are the most pressing concern. Most owners have a significant portion of their net worth “tied up” in the value of their business. Over the years, they’ve probably invested a significant amount of capital, disposable income and sweat equity in the business. Owners should consider whether the sale proceeds are sufficient to support the owner and his or her family post-transaction. There are also important tax issues that need to be considered that will have impact on the structure of any potential transaction. One of the first things any owner contemplating a sale of a business should do is consult an experienced tax adviser.

Consider what kind of legacy you wish to leave. For some small business owners, the thought of their company being sold and being absorbed into a large conglomerate can be upsetting. An owner needs to determine whether it is important if the business survives as a stand-alone entity.

Do you want to have a continuing connection to the company? Some owners like to continue to be involved and own a portion of the company post-transaction. Many purchasers welcome the previous owner’s presence as a consultant, board member or executive to help ease the transition.

Consider Your Sale Options

Once you’ve clarified your objectives, you can examine the alternatives you have for selling the business. Your goals and the company’s position in the market will determine which option is best for you.

Management Buyout

In a management buyout (MBO), the business owner sells the company to the existing management team. An MBO can be structured as a cash payment at closing, payments over time or a combination of the two. In deals where payments to the seller continue over time, it is crucial that the seller-owner have a high degree of confidence in the ability of the company to thrive under existing management. For business owners who are concerned about the legacy of the company, this is one of the best alternatives because the ongoing involvement of the management team provides continuity.

While the due diligence process involved in selling to a management team is fairly simple, the challenge is for the management team to raise enough capital to satisfy a business owner’s up-front cash requirements. Management has several available alternatives to finance an MBO, including their own personal resources, friends and family, loans from a bank (particularly the company’s existing lender) and private equity firms.

We have found MBOs to be a preferred option for many sellers. For example, we recently worked on an MBO where the company has performed well and the owner hasn’t been involved in the business operations for many years. In this case, the owner had a close relationship with the management team and wanted to provide them with an opportunity for ownership. In addition, the owner recognized that it would be challenging to sell the business without the management team’s participation. As a result, the owner and management team jointly searched for private equity to participate in the MBO. This was a win-win for both parties. The owner received an attractive price for the company up front and the management team became a significant equity owner of the company post-transaction.

Strategic Buyer

Sometimes the most obvious buyer is a company that a business owner works with on a daily basis — a customer, supplier, competitor or joint venture partner. These companies are usually familiar with the industry and the company, thereby reducing due diligence and execution time. Strategic buyers can also identify and exploit post-transaction cost savings or synergies, which may lead to a higher purchase price. Depending on the size of the transaction, a strategic buyer may partner with a private equity firm to provide additional capital.