Many business people think the term “exit” means selling the business to a third party. Many other options are available. In fact, the term “exit” doesn’t necessarily mean leaving the business at all.

Only a small fraction of owners succeed in actually selling their business to a third party. Owners often think their business is worth more than what a buyer is willing to pay. Many times the business simply isn’t saleable, or cannot be sold for enough money to fund the owner’s retirement. The books may be a mess; or the business may be too dependent on the owner’s involvement. If the owner begins the process early enough, these issues can be addressed and the business can eventually be sold. In other cases, the owner can’t wait that long and needs cash right away. This scenario is a potential candidate for an Employee Stock Ownership Plan (ESOP), a management buy-out, or a private equity group recapitalization (PEG recap).

GRADUAL OR PARTIAL EXITS
Gradual or partial exits are excellent options for owners who want to unlock some of the equity in their business, but want to continue running the business for an extended period of time. An owner who isn’t ready to retire may still be driven to grow the business she founded. But she may need cash to fund a significant expense, such as kids in college, caring for aging parents, etc. Or perhaps additional capital is needed to diversify or expand the business. These situations are potential candidates for a PEG recap or a leveraged ESOP.

Change the above facts slightly so the owner doesn’t need to raise cash now. But she realizes she will be leaving the business some day, and wants to plan ahead and do it on her own terms. She wants her eventual exit to be as tax-advantageous as possible, and/or wants to see her senior management team take over the business when she leaves. These are ideal scenarios for an ESOP or ownership transition plan, or even a gifting/estate planning solution.

PRESERVING THE MISSION
Perhaps the owner is ready to retire, but doesn’t want to hand his “baby” over to an external buyer, who may not preserve the owner’s mission or values. He may be concerned the buyer will lay off some of his valued employees, or simply not treat them or his customers the way he thinks is best. If the owner has valued senior employees who have expressed an interest in taking over the business when he retires, this is an ideal opportunity for a management buy-out or ownership transition plan.

In other cases, an owner may want to keep the business in the family. One or more of his children may be involved in the business and willing and able to take over. A sale to a third party is obviously inconsistent with that goal. However, employing gifting and estate planning techniques will help achieve the owner’s objectives.

Business owners who fit any of the above scenarios have many options other than selling their business. They should seek the counsel of a qualified exit and succession planner to work with their business attorney, CPA, and other advisors, depending on the options being considered. The process requires bringing in advisors at an early stage to conceive and execute a plan, which usually occurs over a period of several years. Owners with enough foresight to start this process early on will see that the term “exit” doesn’t necessarily mean selling their business to a third party, and in some cases, doesn’t mean leaving the business at all.

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.