Exit Planning Solutions: How Do I Exit My Business?
Exit planning is the strategic process through which a business owner, CEO, founder, or investor prepares to transition ownership of the business. It’s more than just a plan; it’s a comprehensive strategy that combines the plan, concept, effort, and process to create a transferable business through strong human, structural, customer, and social capital.
This process may involve conducting a valuation, evaluating business operations, aligning business, personal, and financial needs, and considering the tax and legal implications of the transition to maximize value, ensure a smooth transition, and safeguard the business’s viability. Whether you’re retiring, selling your business, or moving on to a new opportunity, exiting your business is a key part of effective business planning.
The goal of exit planning is to address the future of the business owner, their family, and the business itself by creating value today. Preparing for such a transition doesn’t mean you plan on leaving the business tomorrow; it’s simply a wise strategy to ensure your business remains successful and valuable.
In this guide, we cover the many internal, external, and hybrid exit strategies you can use to exit your business successfully. We will also review how a Certified Exit Planning Advisor (CEPA) can be instrumental in your ultimate decision-making strategy
Types of Exit Strategies
Understanding the various kinds of business exit strategies is crucial for making an informed decision that aligns with your personal and business goals. Exit strategies can broadly be categorized into internal and external options, with some in favor of a hybrid approach.
Scott Snider, president of The Exit Planning Institute, explains, “A well-prepared business owner and company has multiple exit options. That’s the beauty of exit planning. I think as an owner, you would like to have multiple options on the table. The owner can take one bite of the apple or multiple along the way.”
Internal Exit Strategy Options
An internal exit strategy option is a liquidation plan whereby the business owner sells or assigns ownership to a family member, business stakeholder, or key employee(s) rather than selling it to an outside investor or competitor. The advantage of this “inside buyout” is that it helps preserve a continuation of the business legacy.
Family Succession
A family succession involves transferring ownership and management of the business to a family member, often a child or close relative. This option ensures the business remains within the family to best preserve its heritage and values.
Management Buyout (MBO)
In a management buyout, the existing management team purchases the business from the owner. This is ideal when the management team is experienced and committed to the future success of the business.
Employee Stock Ownership Plan (ESOP)
This strategy involves selling the business to its employees by creating an employee stock ownership plan. This option can motivate employees by giving them a stake in the company, potentially leading to increased productivity and loyalty.
External Exit Strategy Options
The primary feature of any external exit strategy option is that the business owner sells the company to a third party, such as an investor, competitor, or other individual. Important considerations for this type of strategy include assessing the proper market valuation for the business, ensuring adequate due diligence, and negotiating the price and conditions of the sale with potential buyers.
Recapitalization
Recapitalization involves restructuring the company’s debt and equity mixture, often to provide liquidity to the owner while retaining control of the business. This strategy can be a way to take some cash out of the business without fully exiting.
Merger and Acquisition (M&A) with Another Business
Merging with or being acquired by another business involves combining with another company, often to achieve synergies and increased market share. This option can provide a profitable exit while ensuring the business’s continued growth and success.
Initial Public Offering (IPO)
An IPO involves offering shares of the business to the public through a stock exchange. This option can provide significant capital and liquidity but requires extensive preparation and regulatory compliance.
Franchising or Licensing
Franchising or licensing involves allowing others to use your business model, brand, and processes in exchange for a fee or royalties. This option can provide ongoing revenue streams and expand the business’s reach without the owner being involved in day-to-day operations.
Liquidation
Liquidation involves selling off the business’s assets and closing it down. This option is often considered when other exit strategies are not viable. It can provide a quick exit but may result in a lower return compared to other strategies.
Hybrid Exit Strategy Options
A hybrid exit strategy involves a blend of the best internal and external exit strategy options to get the best valuation and return. This strategy provides multiple exit mechanisms and enhanced flexibility for investors. Selling shares to a third party combined with receiving dividends or a structured payment is one example of a hybrid exit strategy. Here are a few others:
- Partial Sale with MBO: Selling a majority interest in the company to a strategic investor while the existing management team purchases a smaller stake to keep the business under some control.
- Phased Family Succession with Strategic Partnership: Obtaining operational support with a strategic industry partner while gradually transferring to family ownership.
- ESOP with Partial Liquidation: Selling an interest of the business to a third-party investor while enabling employees to purchase shares of the company.
How CEPAs Help
Certified Exit Planning Advisors (CEPAs) play an instrumental role in guiding you through the process and helping an owner select the best exit planning strategy. They are trained in the Value Acceleration Methodology, which is widely accepted as the most effective way to build and execute an exit strategy. According to Scott, “A CEPA is an educator helping the owner, their teams, and family understand exit strategy more and embrace it.”
Because CEPAs do not benefit financially from one transition option over another, their goal is to help you prepare to align with the best solution based on your personal and strategic priorities. They educate business owners on the relevant types of exit strategies so they are educated and empowered to choose the best one for their specific needs. They can also customize exit strategies based on your unique situation.
From Successful to Significant
Exiting your business is a significant decision that requires careful planning and consideration of all available options. A CEPA can help you with whatever exit strategies you choose and assist in evaluating the best strategy for your particular needs and unique situation. As Scott advises, the first steps for a business owner to successfully initiate exit strategy planning include educating yourself, hiring qualified advisors, and conducting an Enterprise Value Assessment.
Remember, “A well-prepared business owner and company has multiple business exit strategies.” Work with an expert CEPA today to embrace a holistic approach that considers business, personal, and financial goals. In this way, you can ensure a successful, smooth, and profitable transition, building value now and for the future.
