Issue 27

Eight Ways To Exit Your Company

According to Paul Simon, there are 50 ways to leave a lover. Not being as creative as Mr. Simon, we’ve only come up with eight ways for owners to leave their companies.

  • Transfer the company to a family member;
  • Sell the business to one or more key employees;
  • Sell to key employees using an Employee Stock Ownership Plan (ESOP);
  • Sell the business to one or more co-owners;
  • Sell to an outside third party;
  • Engage in an Initial Public Offering;
  • Retain ownership but become a passive owner; and
  • Liquidate.

Given the right circumstances, one of these paths is the best for you. The process of determining exactly which path is best presents an obstacle that too many owners choose to avoid. If, however, you wish to "leave your business in style," you must work through a three-step process of selecting your path. During this process you will synthesize or harmonize your exit objectives with the characteristics and capabilities of your company as well as with the external realities of the marketplace.

Establishing thoughtful objectives is the first step of your Exit Plan. Doing so well in advance of your departure gives you and your advisors the time necessary to make your goal a reality.

Choosing a Path

Step One. First, you, as an owner and with the help of your advisors, identify your most important objectives. (See Issue 2 for more information.) These objectives are both financial ("How much money will I need from the transfer of the business to assure my and my family’s financial security?") and non-financial ("I want the company to stay in the family," or "I want to remain involved.").

Internal and external considerations impact an owner’s choice of exit path. For example, the owner who wishes to transfer the business for cash, but is unwilling to throw his company's and his employees' fates on an unknown third party, may decide that an ESOP or carefully designed sale to his key employee group is the best exit route.

Exterior considerations that may impact the choice of exit path are: business, market or financial conditions. For example, the option of selling your business for cash to an outside buyer may be eliminated because of the anemic state of the M&A market.

Step Two. As you develop consistent objectives and motives, you then must value your company and determine its marketability. This analysis usually provides further direction and can eliminate potential exit paths.

For example, if the value of a company is high and its marketability is low (perhaps because of the depressed state of the M&A market), an owner may decide that a sale of the business to an outside party is impractical. Instead, selling to an insider” (co-owner, family member or employee) may be a better option.

Step Three. The final step in choosing a path is to evaluate the tax consequences of various exit paths. This evaluation will include factors such as form of business entity as well as any changes that must be made. Again, if a sale to a third party would likely mean a sale of assets and the company is a "C" corporation, the adverse tax consequences indicate a sale via an ESOP.

Using this three-step process, owners narrow the list of exit routes. If more than one route remains, owners and their advisors must conduct open and frank discussions based on realistic possibilities to determine which path to take and when. Make sure your Team of Advisors knows the pros and cons of each exit path.

Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit Planning.