Which Exit Strategy Is Best For You?

SHOP MANAGEMENT

Which Exit Strategy Is Best For You?

July 19, 2010
By Ted Thomas, Contributing Writer

Whether you’re approaching retirement or you simply no longer get a kick out of running your own business and are ready to let someone else take the helm, at some point in the future you will have to consider an exit strategy.

Proper transition planning allows you to leave the business when you want to on your terms. With an approximate exit date in mind and a sense of the post-exit income required to achieve your financial objectives, a proper plan lays out a road map that allows you to exit your business in style.

Part of the process involves determining which exit strategy is best for you. Some of the more common options for leaving a business include transitioning the business to family members; selling to a business partner or employee(s); selling to a competitor; selling to a third-party buyer; cashing out part of the business but maintaining an equity share or operational role; and liquidating the assets and closing the company

Your Exit Strategy Options
No owner can effectively leave a business without thinking through the basic question, “To whom do I want to transfer the business?” As you think this through, it's important to recognize that you don't have to pick one option and live with that choice forever. You can eliminate some options altogether and narrow it down to, say, three alternatives. Then, prioritize the most viable options and build out an objective that could go something like this:

"I'd like to have my daughter, Kendall, take over the business in four or five years and keep it in the family for another generation. But if Kendall decides that she doesn't want to run the business, I'm going to hire a business broker or M&A firm and try to sell the company to the highest bidder."

Deciding on how you want to exit the business will set a series of actions in motion. For example, when selling to a family member, you’ll typically want to minimize the tax consequences to the buyer and the seller. Since a buying family member typically cannot pay cash for the business, the seller's sale proceeds will come out of the future proceeds of the business.

Minimizing tax obligations and avoiding double taxation is a primary goal, ensuring that a greater portion of the company's future cash flow will be available for you, the departing owner. This transition has many moving parts and requires the leveraging of several strategies to ensure a successful succession within the family.

The strategies involved in selling to a third-party buyer are very different from those of selling to a family member. In either case, optimizing the outcome requires specific steps that can take a few years to properly implement. This is why it's imperative that business owners start thinking seriously about their end-game strategy long before they formally list their businesses for sale.

Admittedly, the day-to-day obligations of a business owner make it difficult to think too far down the road to when he or she will ultimately leave. But postponing the development of a well-structured plan is often the biggest mistake an owner will ever make. When this happens, too many owners end up selling their companies under duress and fail to maximize the proceeds and minimize the tax obligations at the time of the exit.

The sobering fact is that each day, valuable businesses close their doors with no prospect of continuing and no financial win for the owner who spent years building them up. Don't let that sad ending be the epilogue to your business adventure. Determine which exit strategies you want to pursue and put a plan in place to have a successful exit so you and your family can enjoy life after you leave the business.

Ted Thomas is managing partner of Sun Exit Advisors, Chicago. He has more than 30 years of hands-on experience as a business owner, business consultant, real estate investor and transaction intermediary. He has founded, managed and transitioned from three successful service businesses. He has been a consultant to small, mid-sized and Fortune companies, and has held executive positions within the financial services, manufacturing, real estate and dot-com space.

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