Selecting the Best-Suited Business Exit Path
Those who have been following BEI for some time know that there are weekly opportunities for Exit Planning education in the form of online webinars. BEI believes that some of the best insights and advice come from peers who are actively using Exit Planning strategies in their daily work, which is why we invite guests and strategic partners to host some of the webinars.
In today’s blog, we want to feature one of our recent presentations put on by Footprint Capital as it gave an informative take on each of the business exit paths. Michael Butler, Senior Director of Footprint Capital, is responsible for leading sell-side and buy-side engagements with business owners. In addition, Michael cultivates relationships with clients, prospects, centers of influence, private equity firms, and family offices. His diverse and uniquely suited background helps him to advise owners on their business exit strategies, no matter their preferred exit path.
Titled “Everything You Need to Know About the Exit Process,” this webinar gave a great overview of the benefits and downfalls of each type of exit path. Sharing notes from this portion of the presentation gives a functional, high-level pros and cons list of the various business exit paths, all in one place. In addition, the links included in the descriptor lists below link back to more in-depth BEI blog posts about specific exit paths.
Footprint Capital’s Take on the Exit Planning Process
Footprint Capital is a mergers and acquisitions firm at its core. However, as Michael and many other BEI Members would attest, the Exit Planning Process requires advisors of many industries to play a role.
Exit Planning combines the plan, concept, effort, and process into a clear and simple strategy to build a business that is transferable through strong human, structural, customer, and social capital. Regardless of the specific industry an advisor serves, those who act as Exit Planning Advisors:
- Look at Exit Planning as a business strategy
- Seek to build, harvest, and preserve wealth
- Work to identify, protect, build, harvest, and manage enterprise value
- Simplify the process and clarify the roadmap to success
- Create and document a plan
This is an image that Footprint Capital used in their webinar outlining the timeline and tasks to use when assisting a business owner in finalizing their exit strategy.
Types of Exits: Inside & Outside
Business owners have plenty of options in terms of business exit paths. With the large number of choices to make, they often find themselves at a crossroads, faced with choosing which business exit path is most reasonable and potentially most profitable. It is up to the team of Exit Planning Advisors to ask the appropriate questions that will get to the root of their post-exit aspirations. They should also lay out the pros and cons to each path in a way that shows the owners which path makes the most sense for their personal and financial goals and give them a starting point.
Pros & Cons of Inside Transitions
- Business legacy preservation
- Planned from an earlier start
- Lower costs involved
- More control of the transition process
- Less disruption to business operations
- Family dynamics can lead to friction
- Illiquid buyers/lack of funding and resources to buy
- Lower sale price
- Key employee flight risk
- Tradition may outstrip good strategy
- Path of least resistance but not always the path to growth or success
Sale to Employees (Employee Stock Ownership Plan, ESOP)
- The business stays in the “extended family.”
- Shares purchased with pre-tax dollars by the ESOP
- Taxable gain on the shares sold to the ESOP by the owner may sometimes be deferred (1042 rollover)
- ESOP is an employee benefit and may cause employees to act like owners
- Can be complicated and expensive
- May not work for some entities (culture)
- Company compelled to buy back shares from departing employees (repurchase obligation)
- Generally will not maximize proceeds (Fair Market Value standard)
Management or Partner Buyout
- Business continuity
- Highly motivated buyers
- Preserves human capital
- Planned from an earlier start
- Can be combined with private equity to access additional capital and resources for growth
- Threat of flight (coercion of owner)
- Illiquid buyers
- Lower price and heavy seller financing (increases risk)
Pros & Cons of Outside Transitions
Strategic Buyer or Independent Sponsor
- Higher price (generally highest of all options)
- More cash up front
- Business owners can walk away faster
- Stable deal terms
- Can create distraction or loss of focus for the business owner
- May give way to privacy concerns
- Can be emotional for owner
- Potential employee concerns
Private Equity & Family Office
- Higher price (generally at or near highest of all options)
- Often the ability of the owner to maximize total business value and retain equity
- Retention of employees and incentive to key people
- Experienced and professional buyers
- Owners are generally required to remain working post close
- Can create distraction or loss of focus for the owner
- May cause privacy concerns by involving key employees
- Sell side process sometimes seems complex to business owners
While this list is not comprehensive, it is wise for advisors involved in the Exit Planning Process, no matter their industry, to be familiar with each of the business exit paths in order to determine which is best suited for their client’s situation. Many concepts that fall under each of the exit paths seem complex and unfamiliar to business owners and it requires Exit Planning knowledge, even if just at a high level when working with business owner clients.
To begin gaining knowledge in Exit Planning, take a look at the BEI schedule of free weekly webinars & tune in to learn some of the industry’s best tips and tricks.
Additionally, to listen to the recording of the webinar outlined above by Footprint Capital’s Michael Butler, visit the link below. In this recording, Michael continues to further break down the role of advisors, as well as a step-by-step guide to the sell-side process.