This article is the second in a series on Exit Planning for owners of privately held businesses.
In my first article I wrote about the advantages of having an exit plan. This article will make it clear that the choices are many, and just about any privately held business owner will find an exit option that meets their goals and objectives. The chart below is the best graphic I have found that outlines all the options available. Chart Source: Exit Planning Institute
As you can see, Exit Options are generally divided into Internal Transfers and External Transfers.
Internal Transfers are those options that involve a party that is related to the exiting owner. The business could be transferred to the owner’s family, a charitable organization the owner belongs to, such as a church, or the employees of the company, through a management buyout or ESOP. If the business has other co-owners, the existing buy/sell agreement could become the governing exit plan.
External transfers can include a 100% sale to a 3rd party or, a recapitalization, which is accomplished by selling a controlling interest in the business to a Private Equity Group (PEG). In this case, the owner can continue with the business and reap the value added by the PEG when the business is ultimately sold. If your company is really large ($500M+) and well positioned, “going public” is certainly an option to be considered.
Choosing the right exit option is crucial to the process. In most instances, many of the options can be quickly eliminated by the owner but, careful consideration is necessary when narrowing down to the most appropriate one or two choices. As stated in my previous article on the benefits of having an exit plan, a well developed and conceived plan will maximize the value of the business upon exit, minimize estate and capital gains taxes and maximize the owner’s life after business satisfaction.
Although the chart above looks complicated, the process need not be. Many owners have a difficult time recognizing that they will, inevitably, exit their business, one way or another. Starting the process early rewards proactive owners with peace of mind, financial preparation and allows them to begin to come to grips with their own mortality. If there is no plan in place, the exit option will be chosen for you, most likely by family or advisors left in a desperate situation with the IRS on one side and Creditors on another. The passing of the owner of a privately held business will likely trigger large tax liabilities and creditors may become uncomfortable with the consequences from the former owner’s lack of a coherent exit plan. Life is full of choices, most of us would prefer to have as many options as possible to choose from. The lack of an exit plan will severely limit the choices available to your surviving family and, most likely, force a single option that may be contrary to your intended legacy. As the owner, would you prefer to choose the legacy left behind, or have it chosen for you?
Are you ready to begin your exit plan?
Cliff Olin, MBA, CM&AA, CEPA and principal at Olin Capital Advisors, a small to mid market, mergers and acquisitions advisory and exit planning firm. Cliff is a Certified Exit Planning Advisor and has spoken to many groups regarding Exit/Transition Planning. He can be reached at firstname.lastname@example.org.