Is It Time to Sell or Transfer Your Business?

February 15, 2019

by Dean Simmons

A look at three options for a smooth exit strategy

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 the head of a small to midsize company, you work hard to make sure your business thrives.

But eventually there comes a time when you decide you’re ready to move on, either to a relaxing retirement or an exciting new challenge.

So how can you ensure a successful transition out of your business?

  • Exit strategies come in many forms; here are three popular options:
  • Transferring your company to your family
  • Arranging a management buyout
  • Selling your business to a private equity group

Transfer to Family
If your company is a family-owned enterprise, this approach allows you to continue your family business legacy and create employment and retirement security for your loved ones.

Transferring a business to a family member, however, comes with some unique challenges.

First, you’ll need to ensure that your successor is capable of and willing to take full ownership responsibilities.

Family member or not, qualifications—determined through an objective assessment—should be the main factor in choosing your firm’s next leader. Click To Tweet

In addition, if multiple members of your family have been involved in the business, it may be difficult to treat them all in a way they feel is fair and equitable.

One tactic for transferring your business to your family is a gradual transition, where one or more family members assume ownership responsibility over an extended time period.

A gradual transfer is generally executed over many years, and in most cases your shares would be purchased using the cash flow from your business.

Management Buyout
Has your leadership team expressed interest in purchasing your company when you leave?

Given their experience, expertise, and institutional knowledge, selling the company to your managers rather than an outside entity can make for a more seamless transition.

Plus, the transaction may take less time, especially if the buyers have funding through their own resources, bank financing, or through private equity.

On the other hand, while selling to existing management may take less time and effort, you may not be able to maximize your asking price in the absence of competing bids.

Also, with advance knowledge of your plan to leave, your managers may use their own ability to go elsewhere as a strong bargaining chip in negotiations.

Sell to a Private Equity Group
Selling to a private equity group may get you closer to your asking price versus the other two options.

And this approach typically means you’ll be making a clean break from your business, although the sale may be contingent on you continuing employment for a specified period of time to ensure a smooth transition.

Also on the plus side, the new owners will likely retain most of your employees after the sale. They could also incent your management team to stay on with equity or bonus plans and may make investments to grow the business.

A distinct disadvantage, however, is that closing the deal typically takes from several months to a year, giving the prospective buyers time to conduct a valuation of your business.

Planning Is the Key
When you make the decision to leave your business, it’s critical that you thoroughly plan your departure. Click To Tweet

At a minimum, that means getting your financial house in order; ensuring you have a large, diversified, and satisfied customer or client base; and being confident that the company can succeed and grow under new leadership.

If you’re contemplating leaving your business within the next few years, now is the time to begin planning for your exit.
Starting the process sooner rather than later will ensure that you get the most value for your hard-earned efforts over the years and give you peace of mind knowing that you’ve left your company in good hands.

CONNSTEP Business Growth Advisors can help you devise effective succession planning and exit strategies. Contact us at 1.800.266.6672 or online at www.connstep.org/contact.

Dean Simmons (dsimmons@connstep.org) is the content and campaign strategist at CONNSTEP.

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