It’s probably fair to say that every business owner has had a day where they wanted to say, “I’m outta here!”. Running a business can be rewarding, fulfilling, profitable, but also very tough. But not so fast, before any business owner can pack it in, they need to have a viable exit strategy. These can be years in the making. I’ll save the basics of what it takes to have a successful exit for another day. Today, I want to focus on some types of exits.
One option is to simply retire and wrap up the business. Now, this doesn’t provide any exit value but it happens frequently. While this happens to small businesses (the auto repair shop down the street from me and the fish market a few miles away to name two in my community), I have also seen it happen to larger businesses as well. I know of a multi-million dollar retailer where there was no apparent better option for the owner other than to close up shop and liquidate the real estate.
Another option is to sell to key employees. This can work if you have developed the employees to run the business in your absence. I have a client who successfully acquired his business in this manner. But if you’re expecting an immediate pay day, think again. Your employees probably won’t have a large enough nest egg to pay cash and the bank will only finance a limited portion of the purchase price. Think seller financing which means if something goes drastically wrong, you’ll own the business again!
A family succession plan is an option if you have a son or daughter (or perhaps niece or nephew) who you have brought into the business and they have the talent to keep it going. But here again, there will be financing issues although you also have some estate planning tools that may help. In this case, you’ll also be dealing with family dynamics which can be daunting. I once casually commented on the wounds I received working for a family owned business (not my family) at a board meeting. The gentleman next to me turned and said with a laugh, “Do you realize who you’re sitting next to?”. His family business transition (and related lawsuits) were hot topics in the local business press.
You could form an ESOP (Employee Stock Ownership Plan). That’s an option but the management team had better be ready to step it up. An ESOP is costly to administer afterwards with a trustee, annual audits, valuations, etc. Again, think about financing and taking back a seller’s note.
Sell to a 3rd party. Another option but you need to make sure you have created an attractive asset. Profitable, good management team, diverse client base, an industry that is “in-favor”, and ideally you’ve been an absentee owner for a several years. There are both strategic and financial buyers who may buy either all or part of the business (giving you a second bite at the apple in the case of the latter).
Books have been written on the subject of business exits while I’ve tried to cover it in a scant 500 words. My goal isn’t to cover a topic in depth, rather it’s always meant to provide some food for thought.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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your cash is flowing. know where.®
Ken Homza
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