Credit: Shutterstock photoAre you a business owner thinking about exiting your company? Which exit route benefits you most? It's a move tough to undo and you better know the pluses and minuses going in.
While the number of exit routes seems unending, you generally choose from only eight: transfer the company to a family member; sell the business to one or more key employees, to employees using an employee stock ownership plan (ESOP), to one or more co-owners or to an outside third party; engage in an initial public offering ( IPO ); retain ownership and become a passive owner; or liquidate.
While your emotions at the exit process can overwhelm you at times, your decision-making can be relatively straightforward.
First, establish personal and financial objectives to identify the best buyers of your business. Second, determine the value of your company. Finally, evaluate tax consequences of each exit path.
Transfer to a family member. Owners usually consider transferring businesses to family members for non-financial reasons. Among the advantages, this transfers the company to a known entity, provides for the well-being of your family, perpetuates your company's mission or culture and allows you to remain involved in the business.
Disadvantages include:
- little or no cash from closing available for retirement;
- increased (and continued) financial risk;
- required owner involvement in company post-closing;
- children's inability or unwillingness to assume the ownership role; and
- the family issues that surround treating all children fairly or equally.
Transfer to key employee(s). With this type of transfer, you hope to achieve the same objectives as when transferring the business to a family member, with the added goal of achieving financial security (albeit potentially over time).
Disadvantages of this route resemble those in family transfers and include employees' possible inability or unwillingness to assume ownership.
Transfer via ESOP. These qualified retirement plans must invest primarily in the stock of the sponsoring employer. In addition to the advantages of a standard transfer to key employees, you enjoy tax benefits as well as cash at closing.
Again though, not all aspects of this route benefit you. ESOPs are costly and complex, offer limited company growth due to the borrowing necessary to buy the owner's stock, net less than full value at closing compared with third-party sales and use company assets as collateral.
Sale to co-owners. Advantages again resemble those of transferring your business to a family member. Disadvantages are need to typically take back an installment note for a substantial part of the purchase price and, as in other avenues, increased financial risk, owner involvement past closing and normally netting less than full fair market value.
Sale to a third party. This offers your best chance at receiving the maximum purchase price for your company and the maximum amount of cash at closing. The route appeals to owners intending to leave after they sell and to owners who want to propel the business to the next level with someone else's financial support. It also allows you to control your date of departure.
Disadvantages include: potential loss of your personal identity as the business owner; potential loss of your corporate culture and mission; potential detriment to employees if you sell to a party that seeks consolidation; and, depending on the sale structure, part of the purchase price may be subject to future performance of the company after the sale.
IPO. This route offers high valuation and cash for the business. Unfortunately, the IPO comes with significant disadvantages, primarily:
- limited liquidity at closing;
- not a full exit at closing;
- loss of full control;
- additional reporting and fiduciary requirements; and
- your company needs to be over $250 million at least for an appropriate exit option.
Passive ownership. This attracts owners who wish to maintain control, become less active in the company and preserve the company culture and mission. Your disadvantages stem from your never being able to permanently leave the business, your receiving little or no cash when you leave active employment and that you continue to carry the risk associated with ownership.
Liquidation. Only one situation justifies this route: You want or need to leave the company immediately and have no alternative exit strategies. Liquidation offers speed and cash - and enormous disadvantages:
- yields less cash than any other exit route;
- comes with a higher tax burden than any other type of sale/transfer; and
- has a potentially devastating effect on employees and customers.
Carefully compare each path in relation to your objectives. Experienced advisors can offer valuable guidance, examples and market perspective.
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Nate Wenner is a regional director at Wipfli Hewins Investment Advisors and Jeff Milkie is managing director at Wipfli Corporate Finance Advisors LLC in Minneapolis.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
