Thursday, June 28, 2012

Exit Planning Step 4 - The Exit Options

There are various exit options available to business owners.  The key to Step 4 of the exit planning process is to identify which exit option will best accomplish the goals defined under Step 1.  The exit options generally fall under two categories: internal transfers and external transfers.

The internal exit options include a transfer to the next generation, the existing shareholders, management or the employees.  Some of the advantages and disadvantages of each option to consider include:

Internal Transfer


Family member
-  Business stays in the family
-  Can be a timely and seamless process
-  Avoid information leak and confidentiality issues
-  Likely will not maximize price
-  May cause family discord 
-  May not receive cash at closing
-  Existing shareholders know the business
-  Can be facilitated through SH agreement
-  Funded with proceeds from life insurance
        -  May not maximize price          
        -  Potential dispute if poorly prepared SH agreement
        -  May not receive cash at closing
        -  Management team knows the business
        -  Avoid information leak and confidentiality issues
            -  May not maximize price
            -  May not receive cash at closing
            -  May require additional debt or equity financing
            Employees (ESOP)
            -  Allows gradual exit over time
            -  Increase employee productivity and company profitability
            -  May be a lengthy process
            -  Business buys back shares if employees leave

            The external exit options include a third party sale (business owner stays under contract for a period of time to ensure a smooth transition or leaves the business immediately), a public offering, a recapitalization or liquidation.  Some of the advantages and disadvantages of the external exit options include:

            External Transfer

            Third party sale – stay or leave
            -  Potential to maximize price
            -  Strategic buyers may pay a premium
            -  More likley to receive cash at closing

            -  Information leak and confidentiality issues
            -  Could be a longer process
            -  Buyer may require VTB or earn-out
            -  Issues with transferability of customers and relationships if owner leaves
              Public offering (IPO)
              -  Provides additional capital to fund growth
              -  Gives company a higher profile
              -  Valuation multiples are higher
              -  Need high revenues, earnings and growth
              -  Business owner could lose control
              -  Time consuming and very costly
              -  Securities regulations
                Refinance / recapitalize
                -  Owner can take some money off the table and diversify risk
                -  Owner can remain actively involved
                -  If debt used, increases leverage and risk and may require personal guarantees
                -  If equity used, owner now accountable to equity partners
                -  Generally simpler and faster

                -  Lower net proceeds due to liquidation costs
                -  Loss of jobs and severance costs

                Serious consideration should be given to each of these exit options.  The options that will best achieve the business owner’s goals warrant further analysis and investigation.  Next week, we discuss the further analysis under Step 5 – The Net Proceeds Analysis.

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