Business Owner Succession Planning and Exit Strategies

January 07, 2020

by Dean Simmons

Selling the business. Exiting the company. Transitioning out of the organization. Whatever you call it, you are planning to leave your job as a business owner.

As a small to medium-sized business owner, you work hard to make your company as successful as possible. And eventually, there comes a time when you decide that you are ready to depart your business either to retire or to do something else. So what’s next?

There are a variety of ways to leave your company with three common options being:

1) Transfer to family
2) Management buy-out
3) Sell to a private equity group

Transfer to Family

When transferring a business to family, you could undertake a transition where a family member(s) gradually takes over running your business. Generally executed over many years, in most cases, your shares would be purchased using the cash flow from your business.

Advantages to this scenario are that your family business legacy continues, and you create employment and retirement security for family members. Disadvantages include financial risk if your family successor does not have the capability or willingness to take full ownership responsibilities. And it may be difficult to treat multiple family members who are involved in the transition equally.

Management Buy-Out

Rather than sell your business to an outside organization, your managers or senior leadership may have expressed interest in purchasing the company when you decide to exit it. Given the skills and knowledge of key managers about your business, a more seamless transition can take place.

The process of acquiring ownership may take less time especially if they have the funding through their own resources, bank financing or perhaps through private equity. While it may take less time and require less due diligence selling to existing management, your asking price is unlikely to be maximized with no competing bids. Management’s ability to leave knowing your intentions may also give it an unfair negotiating advantage.

Sell to a Private Equity Group

While an owner may not receive his asking price for the business, selling to a private equity group may get him closer to his number compared to the other two previous exit scenarios. This is probably the closest example of selling all of your business to a third party and walking away. Although the sale may be contingent on your continuing employment for a specified period of time to ensure a smooth transition of ownership and operations.

Key advantages to this option are that almost all employees will likely be kept on after the sale; management could be incented with equity or bonus plans to stay on after you’ve left; the new owners may make investments in the company to grow the business. A distinct disadvantage is that the sales process typically takes from several months to up to a year to close the deal. During this time period, the new potential owners do their due diligence to determine the financial value of your business, a standard contingency before purchase.

Exit Planning

It’s important to remember that when you make the decision to leave your business, you thoroughly plan your departure. From getting your financial house in order, to making sure you have a large diversified – and satisfied – customer base and not just concentrated among a few, to knowing the business can carry on with the management in place after you’ve left the building for good.

If you are contemplating leaving your business within the next few years, now is the time to begin planning for your exit. It will result in you getting the most value for your hard-earned efforts over the years and give you peace of mind… Click To Tweet

CONNSTEP business growth advisors can help with your succession planning and exit strategies. Contact us!

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