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What are My Options For Exiting My Business?

April 24, 2018 Doug Walker
many exits business exits business succession

Options for exiting your business voluntarily are limited only by the imagination of the buyer, the seller, and their advisors.

In broad terms, you can simply wind up operations and sell off your assets, or you can sell your business as a going concern privately or via a public offering. The values realized, complexity, and processes used vary widely within each of these three basic models: 

Liquidate

This means ceasing operations, paying all outstanding debts, and selling all assets piecemeal. This can generally be done simply and quickly, unless there are complicated legal arrangements to be untangled.

Liquidation usually yields lower returns than selling an operating business, because nothing is realized for intangible assets such as client lists, goodwill, reputation, and future earnings potential. Unfortunately, it may be the only practical strategy if the owner hasn't done any preparation for an orderly sale of the business.

It may not be possible to find a buyer willing to carry on the business if client relationships and sales are largely dependent on the current owner's direct involvement. This is often the only option for advisory practices owned by sole practitioners, unless arrangements can be made to transition client relationships to someone else's similar practice, selling a client list in the process.

Also read: The Ultimate Business

It may also make sense to liquidate your business if it is only marginally profitable but the assets are relatively valuable. The valuable assets can then be redeployed more profitably. 

Although often thought of as inexpensive, liquidation can be costly, depending on the business complexity and marketability of the assets. Finally, remember that liquidation means that all employees lose their jobs and all business arrangements are severed.

Sell the Business Privately

Most businesses as sold as going concerns, through private sales. These are often implemented gradually, where the owners transition through one or more intermediate ownership levels and roles before fully retiring. This is often referred to as a "restructure and remain" strategy.

All private sales that occur gradually should be protected by contingency plans, to protect the seller's interests in the event the new owners default on their payment obligations to the seller. This could involve insurance, or even the right for the seller to resume control in the event of default. 

There is no clear best model of private sale that generally allows the seller to realize maximum value. Properly implemented, any of the models below can be effective. 

Sell to family members. 
 
Family-owned businesses can become enduring sources of income for multiple generations. Transferring ownership of the business to other family members generally involves bringing them into the business well in advance of your exit, training them while you gradually reduce your involvement, and accepting your payment for the sale over a long period of time.
 
This raises complicated issues of motivation (do your kids really want it?), cost (how can they pay for it?), family dynamics (who gets which position and compensation?), etc. Families owning and operating businesses together must deal with these challenges, on top of dealing with the regular challenges of running successful businesses.
 
Owners of family businesses often join one another through organizations such as the Family Business Association of Vancouver Island to help deal with these complexities. 

Sell to co-owners. 
 
Businesses having multiple owners may have the opportunity to sell the shares of a departing owner within the group of remaining owners. Shareholder agreements in privately held companies typically contain buy-sell provisions that govern how these transactions occur. If properly constructed, such provisions can often deal with having multiple owners depart, even when this happens unexpectedly such as through sudden illness or death. Share prices and payment schedules may be negotiated between buyers and sellers, or established according to provisions in the shareholder agreement.

Sell to employees. 
 
Selling to one or more employees who do not already comprise a shareholder group transforms the business to an employee-owned operation. This will require a comprehensive shareholder agreement to be established, setting out rights and responsibilities of shareholders, buy-sell provisions, corporate governance, dispute resolution, amendment provisions, and related matters.
 
The buyers may be part of the existing management group, a select set of employees, or any interested employees. This strategy is often implemented incrementally, allowing the owner to gradually divest both ownership and operational responsibilities.
 
Third-party financing is often used to facilitate these sales. Bank or private debt, guaranteed by the seller or by the business itself, is used to pay some or all of the purchase price. The balance is paid over time by the buyers, often in large part from future company profits accruing to the new shareholders. 
 
A management buyout (MBO) is a sale to employees who are all or part of the management team. Although intuitively attractive, an MBO can be difficult to implement in a successful company, because buyers are challenged to provide the funds needed to purchase the company at its fair market value. 
 
An employee stock ownership plan (ESOP) is another type of sale to employees. Here, some or all employees buy the company gradually, perhaps through a payroll deduction plan or "golden handcuffs" scheme requiring no initial investment. Shares may be transferred to the employees when purchased, or held in trust for a vesting period or even indefinitely. If employees are allowed to purchase the shares at less than market value, then a taxable benefit may be created. Funds to purchase the shares from the owner come from employees at the time of purchase, future earnings on the purchased shares, and/or external debt guaranteed by company assets.
 
Some companies implement an ESOP to encourage employees to think like owners, as well as to improve retention. An ESOP can lead to costly share transactions, if mandatory share sales are needed when employees leave the business.
 
Sell privately to outsiders. 
 
Private sales to outsiders can take many forms. Buyers are generally classified as being either strategic (usually a competitor, customer, or supplier who wants to run the business as part or their current operation) or financial (investors who are looking for financial returns and might not get involved in running the company).
 
Private sales to outsiders are often packaged as asset sales, rather than sales of the business entity itself (share sales). Sales of sole proprietorships are always structured as asset sales, because the business has no shares.
 
Sellers of small businesses often prefer share sales, while buyers prefer asset sales. From the seller's perspective, share sales typically dispose of all the firm's assets and liabilities. From the buyer's perspective, asset sales allow unknown liabilities and unwanted assets to be excluded from the sale. There are also tax implications to the buyer and seller of asset sales versus share sales.
 
Private sales to outsiders often involve business brokers, who are the business equivalent of realtors. Business brokers can help sellers identify prospective buyers, increasing the likelihood that the business can be sold at or above market value. 
 

Sell the Business Publicly. 

Selling the company through an initial public offering (IPO) often yields the highest returns to the seller, with most funds provided to the seller directly at the time of sale. But, it is only suited to high-growth companies with high values.

The company will be significantly transformed, in that the legal requirements for disclosure and compliance with security regulations will open the company up to more public and competitor scrutiny than when it was privately held. An IPO is also expensive, with the process often costing 25% or more of company value.  

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