The primary questions driving exit planning are, when and how? Similar to decisions made in the earlier phases of the business life cycle, the answers depend on your goals and situation. When it comes to selecting and funding an optimal exit strategy, keep these options in mind.
Internal transfers can include selling to your management team or an Employee Stock Ownership Plan (ESOP). Each has its positives and negatives.
Sell to your management team. Positives include minimal disruption for customers and suppliers and more relaxed deadlines. Negatives include that buyers are unlikely to have the funds readily available, so you may have to hold a note in a new capital structure. Good managers are not always good owners.
Consider an ESOP where the company is bought by a qualified plan with shares owned by employees. Positives include significant tax benefits, particularly for owners of C-corporations who may be able to defer the gain on sale by reinvesting the proceeds in a qualified replacement property, and protects and rewards employees and preserves the legacy you have built.
Negatives include administratively complex and costly to establish. The company must be a certain size (usually $1 million-plus payroll) for a leveraged ESOP to financially work and requires significant employee education and engagement.
External transfers can include selling to a third party or recapitalization.
Sell to a third party. Positives include the fact that in a promising merger and acquisition environment there is rich valuations and equity ready to be invested. You will have a clear exit from business. Negatives could include the emotional strain of exiting, and your business may not be as valuable without you.
Recapitalize or sell a majority or minority interest stake in the company. Positives are that this keeps you involved and restructures the balance sheet to create liquidity for investments in growth or distribution as dividends. Negatives include potential conflict with new investors, and added debt that may cause a drag on future business performance.
