According to Paul Simon, there are 50 ways to leave a lover.
Not being as creative as Mr Simon, I’ve got 8 ways for owners to leave their businesses. If done strategically and within a timeframe that can maximise value, they can be the foundation of the owner’s successful exit.
8 EXIT PATHS
1. Transfer the business to a family member
2. Sell to the existing co-owners of the business
3. Sell to the key manager/s of the business (management buy-out)
4. Sell to the employees of the business (employee share ownership plan)
5. Orderly liquidation of the business assets
6. Recapitalize the business (partial sell-down)
7. Sell to a third party
8. Partake in an Initial Public Offering
Given the right circumstances, one of these paths will be appropriate for you. However, the process of determining exactly which path is best can present an obstacle for many business owners.
CHOOSING A PATH
If you wish to “leave your business in style,” I suggest you work through this three-step path selection process.
As you work through this selection process, you will synthesize or harmonize your exit objectives with the characteristics and capabilities of your business, the external realities of the marketplace, and your personal objectives.
When my three business partners and I were tasked to provide a liquidity event for the Propertylink Group Ltd shareholders in 2011, we determined three exit paths that best fit the business. These were 3rd party sales, recapitalization and IPO. We kept restructuring the business around these three paths until the business was ready and attractive enough for one to be chosen and actioned. It took us 4 years to be ready for the chosen path and another year to implement it. The IPO of Propertylink Group Ltd was successfully completed in 2016, and the business achieved a 16 x increase in value from 2011.
Step 1
First, with the help of your advisors, identify your most important objectives. These objectives are both financial (“How much money will I need from the transfer of the business to assure the financial security of myself and my family?”) and non-financial (“I want the business to stay in the family,” or “I want to remain involved”).
Internal and external considerations also impact an owner’s choice of exit path. For example, the owner who wishes to transfer the business for cash, but is unwilling to trust his business and his employees’ fate to an unknown third party, may decide that a management buy-out (MBO) or employee share ownership plan (ESOP) is the best exit route.
Exterior considerations that may impact the choice of exit path include business, market or financial conditions. For example, the option of selling your business for cash to an outside strategic buyer may be eliminated because of the limited choice of suitors.
Step 2
As you develop consistent objectives and motives, you must value your business, and determine its marketability. This analysis usually provides direction and can eliminate potential exit paths.
For example, if the value of a business is high, but its attractiveness to banks to fund a MBO or ESOP is low, an owner may decide that a sale of the business to an inside party is impractical. Instead, selling to an “outsider” (third-party buyer, PE firm etc) may be a better option.
Step 3
The final step in choosing a path is to evaluate the tax consequences and strategies of various exit paths.
Many tax-minimizing techniques require, literally, years to fully implement. Remember, those appropriate tax-saving strategies are often linked to the person or entity you wish to transfer the business to.
Using these three criteria (objectives, value and tax consequences), owners can begin to narrow the list of exit routes. It is far better for you to choose the appropriate exit path than to delay and allow circumstances to force you onto a particular path.
DON'T DELAY
Establishing thoughtful objectives lays the foundation for your Master Transition Plan. Doing this well before your departure gives you and your advisors the time necessary to make your goals a reality.
If you have already decided on a path but have failed to implement the appropriate transfer and tax decisions, you have delayed your departure.
Likewise, if you have decided to sell to a third party, but haven’t prepared your business to go to market when the time is right, you have not taken advantage of the tools that can make your business valuable in the eyes of a third party buyer.
Finally, if you have not yet chosen a specific exit path, we encourage you to conduct open and frank discussions with your advisors about which path to take and when. Feel free to contact me for further suggestions on the pros and cons of each exit path.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact a lawyer or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
