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Exit Paths for Business Owners

This article appeared in the December 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

As we head into another month of this pandemic with yet another set of revised guidelines for a safe return to work, most owners are currently waist-deep focusing on how they can preserve and protect the value of their business while some have their eye on the endgame: being able to someday sell your business for an amount of money that will enable you to live the rest of your life as you see fit.</p> <p>Demographically, we know that the future holds many more sellers than buyers. What we don’t know is how this crisis has impacted that imbalance between the number of sellers and the number of buyers. We suspect that final 2020 numbers will show greatly reduced Mergers & Acquisition (M&A) activity. We also suspect that many owners are not having a whole lot of fun getting lean and mean. If those two assumptions are true, when this market turns around, there will be a host of owners scrambling for their exits.</p> <h5>When the Time Comes, Will You Be Prepared?</h5> <p>When business owners start to think about exiting their companies, the number of possible Exit Paths can seem limitless. In reality, there are only eight:</p> <ol class=" />

  • Transfer the company to family member(s).
  • Sell the business to one or more key employees.
  • Sell to employees using an employee stock ownership plan (ESOP).
  • Sell to one or more co-owners.
  • Sell to an outside third party.
  • Engage in an initial public offering (IPO).
  • Retain ownership but become a passive owner.
  • Liquidate.

According to the Business Enterprise Institute 2016 Business Owners Survey Report, the Exit Paths most owners intend to use are:

  • 59% of owners anticipate a third-party sale
  • 30% anticipate a transfer to the next generation
  • 31% anticipate a management buyout
  • 6% expect to sell to an ESOP
How to Choose an Exit Path

We have found these steps to be the most prudent when starting the process:

Step 1: Start thinking about your exit before you are ready to exit. Owners who give themselves time to plan give themselves the greatest number of Exit Path options.

Step 2: Owners should determine their objectives. Objectives may include when they want to leave, desired successor and how much money they will need.

Step 3: Review the resources available to reach each objective. Resources include business value, non-business income and business cash flow.

Step 4: Owners should retain a professional to determine a company’s fair market value in order to place all owners on the same objective page. Valuation results often eliminate potential Exit Paths. For example, if the value of a company is high but the owner is not willing to devote the time necessary to orchestrate a transfer to employees, a sale to a deep-pocketed third party is a better option for that owner.

Step 5: Owners must perform cash flow projections to determine whether there is sufficient cash available to even consider an insider purchase.

Step 6: Owners must evaluate the tax consequences of each Exit Path. Keep in mind that while this analysis takes place, owners must continue to increase the value of their companies. Additionally, they will likely need to revise their existing buy-sell agreements to reflect the true value of their companies.

About the Author

Matthew D. SumnichtMatthew D. Sumnicht, CPFA, is a Managing Partner and financial advisor at Bowline Financial, LLC. He can be reached at msumnicht@bowlinefinancial.com.

This article appeared in the December 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

As we head into another month of this pandemic with yet another set of revised guidelines for a safe return to work, most owners are currently waist-deep focusing on how they can preserve and protect the value of their business while some have their eye on the endgame: being able to someday sell your business for an amount of money that will enable you to live the rest of your life as you see fit.</p> <p>Demographically, we know that the future holds many more sellers than buyers. What we don’t know is how this crisis has impacted that imbalance between the number of sellers and the number of buyers. We suspect that final 2020 numbers will show greatly reduced Mergers & Acquisition (M&A) activity. We also suspect that many owners are not having a whole lot of fun getting lean and mean. If those two assumptions are true, when this market turns around, there will be a host of owners scrambling for their exits.</p> <h5>When the Time Comes, Will You Be Prepared?</h5> <p>When business owners start to think about exiting their companies, the number of possible Exit Paths can seem limitless. In reality, there are only eight:</p> <ol class=" />

  • Transfer the company to family member(s).
  • Sell the business to one or more key employees.
  • Sell to employees using an employee stock ownership plan (ESOP).
  • Sell to one or more co-owners.
  • Sell to an outside third party.
  • Engage in an initial public offering (IPO).
  • Retain ownership but become a passive owner.
  • Liquidate.

According to the Business Enterprise Institute 2016 Business Owners Survey Report, the Exit Paths most owners intend to use are:

  • 59% of owners anticipate a third-party sale
  • 30% anticipate a transfer to the next generation
  • 31% anticipate a management buyout
  • 6% expect to sell to an ESOP
How to Choose an Exit Path

We have found these steps to be the most prudent when starting the process:

Step 1: Start thinking about your exit before you are ready to exit. Owners who give themselves time to plan give themselves the greatest number of Exit Path options.

Step 2: Owners should determine their objectives. Objectives may include when they want to leave, desired successor and how much money they will need.

Step 3: Review the resources available to reach each objective. Resources include business value, non-business income and business cash flow.

Step 4: Owners should retain a professional to determine a company’s fair market value in order to place all owners on the same objective page. Valuation results often eliminate potential Exit Paths. For example, if the value of a company is high but the owner is not willing to devote the time necessary to orchestrate a transfer to employees, a sale to a deep-pocketed third party is a better option for that owner.

Step 5: Owners must perform cash flow projections to determine whether there is sufficient cash available to even consider an insider purchase.

Step 6: Owners must evaluate the tax consequences of each Exit Path. Keep in mind that while this analysis takes place, owners must continue to increase the value of their companies. Additionally, they will likely need to revise their existing buy-sell agreements to reflect the true value of their companies.

About the Author

Matthew D. SumnichtMatthew D. Sumnicht, CPFA, is a Managing Partner and financial advisor at Bowline Financial, LLC. He can be reached at msumnicht@bowlinefinancial.com.