8 Business Exit Strategies – Pros and Cons of Each Approach

8 Business Exit Strategies: Pros & Cons
1. Intergenerational Transfer (Family)
2. MBO
3. Sale to Partners
4. ESOP
5. Sale to a Third Party
6. Recapitalization (Recap)
7. IPO
8. Orderly Liquidation

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Your business exit strategy is a very personal, often emotional and very much a you decision.

It may also impact several other people you care for, depending on the size of your company.

When it comes time to design your business exit, there are suitable options for all business owners–everyone from an entrepreneur with a startup, to a seasoned CEO. One size does not fit all when it comes to the type of exit strategy you choose; your plan very much depends upon your financial, personal and business goals.

You don’t have to choose just one option.

A strategy often used is described as taking “multiple bites of the apple.” Using multiple or partial exiting techniques can allow you to de-risk over time. This may mean selling a part of the business, cashing in on some of the equity you have in the business or even partially cashing out while still remaining involved for several years post-sale.

It’s concerning to think that 68% of business owners are unfamiliar with their business exit options. Good news: there are eight common exit strategies – four of which occur within the company and four of which occur externally. Each option offers its own set of unique pros and cons, discussed below. Your professional advisory team should work with you to examine all options and determine which technique makes the most sense to implement. We’ll sum them up first briefly, and then follow with a deeper dive into each option.

Internal Business Exit Options:

1. Intergenerational Transfer (Family)
2. Management Buyout (MBO)
3. Sale to Partners
4. Sale to Employees (ESOP)

External Business Exit Options:

1. Sale to a Third Party
2. Recapitalization (Recap)
3. Initial Public Offering (IPO)
4. Orderly Liquidation

Internal Business Exit Options:

Intergenerational Transfer

Intergenerational transfer is the idea of keeping a profitable business in the family.

It’s a good option if you want to pass the company legacy to a child or other family member, however it’s essential to ensure that you are willing and ready to take on that responsibility. This can be more of an emotional decision rather than rational one. According to the Exit Planning Institute, over 50% of business owners want to exercise this option, but only 30% actually do so.

Pros:	Cons:
Business legacy preservation Lower cost More control Less disruption for employees /clients Higher buyer/seller motivation	Lower sale price Lack of funds/ illiquid buyers Family dynamics Key employee flight risk Preparedness of next generation

Management Buyout

In a management buyout, you, the business owner, are able to sell or transition all or part of the business over to the company’s management team. Management uses the assets of the business to finance a significant portion of the purchase price. The idea here is that more seasoned senior team members would ideally be well equipped to manage the company.

Pros:	Cons:
Continuity Preserves key human capital Highly motivated buyers Can be combined with private equity for additional growth resources	Lower price and unattractive deal terms Illiquid buyers Heavy seller financing Managers are not always good entrepreneurs Threat of flight (coercion of owner)

Sale to Partners

The success of a “sale to partners” is closely linked to the existence and quality of a buy-sell agreement. Note: many buy-sell agreements are poorly written and poorly funded.

This option is not available to single-owner businesses. The term “friendly buyer” is sometimes used in this strategy, as it’s likely you would sell your stake to someone known, trusted and familiar with the business.

Pros:	Cons:
Less disruptive Well-informed buyers Controlled process, if buy-sell agreements are in place Lower cost	Lower sale price Competency gaps Buy-sell may restrict selling options Realization of proceeds is often slower Potential discord

Sale to Employees (ESOP – Employee Stock Ownership Plan)

In an ESOP, the business is essentially sold to all of its employees. Typically, the company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees.

Pros:	Cons:
Business stays in the “family” Shares purchased with pre-tax dollars Taxable gain on ESOP shares may be deferred Employees benefit May cause employees to think more like owners	May be more complicated and expensive than other options Requires securities registration exemption Company compelled to buy-back shares from departing employees Generally suited for a gradual exit

External Business Exit Options:

Sale to a Third Party

This is one of the strongest business exit strategies, as you can maintain control over price negotiations and (ideally) set your own terms. You sell the business to a strategic buyer, financial buyer, or private equity group through a negotiated sale, controlled auction or unsolicited offer. This is the best option for maximizing ticket price.

Pros:	Cons:
Higher price More cash up front Walk away faster Cost-effective Business refresh (growth, new energy)	Long process Privacy concerns Emotional for the owner Higher cost May require significant professional hours (CPA, attorney, etc.) Can be difficult to close

Recapitalization / Refinance

Recapitalization is the process of restructuring a company’s balance sheet in order to stabilize its capital structure. This often involves bringing in a lender or private equity investor to allow you to alter the debt-equity ratio of the company to either obtain new capital (for business growth) or to reduce/stabilize personal financial risk. This is a good hybrid option that allows for a partial exit. You may choose to sell a minority or majority position.

Pros:	Cons:
Allows for a partial exit Reduces owner risk – diversifies assets Provides growth capital Works well with other exit options “Second bite” at the apple	Continuing accountability to partners Loss of control Culture shift Slow transaction Expensive relative to benefit

Initial Public Offering (IPO)

An IPO exit takes the company public, selling shares as stock to stockholders. This can be extremely lucrative but also very challenging. The wider public industry may or may not view your company as opportunistically as private investors. This process takes time.

Pros:	Cons:
Allows for a partial exit Higher valuations Reduces owner risk – diversifies assets Can help attract and retain top talent – through stock options Provides growth capital	Long process Complex, requiring significant professional hours (CPA, attorney, investment banker, etc.) Additional financial reporting Loss of control and privacy Investor appetite – Is the market right?

Orderly Liquidation

This is one of the final exit strategies, where the business is closed down and all remaining assets are sold off. A simple, quick process, liquidation is an effective option if the asset values exceed the ability of the business to produce income required to support an investment. Any cash earned in liquidation goes towards paying off debt.

Pros:	Cons:
Good option when asset value exceeds value of going concern Efficient way to exit May be less expensive than other exits	Uncertain proceeds – no guarantee No money for goodwill Emotional Damage to employees and jobs Stigma

In much the same way that you’ve written a business plan to guide your business throughout its life, you should have one that guides the conclusion, too. The good news is that there are options.

The other good news is that you need not navigate any of these options alone. Work with your business exit advisory team to vet your options and plan accordingly.

Note: This article is the fourth piece in a special content series on Business Exit Planning. Also check out:

• 6 Essential Steps Toward Successful Business Exit Planning
• You Need to Know Your “Wealth Gap” Before You Sell the Business
• Who Should be On Your Business Exit Planning Advisory Team?

Again, if you’re interested in learning more about business exit planning, join our live webinar coming up in April!

This document is being provided for informational and educational purposes and is not meant to be taken as specific advice. Oakworth Capital Bank does not provide tax or legal advice. All decisions regarding the tax and/or legal implications of these strategies should be discussed with your tax and/or legal advisors before being implemented.