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Comparing Your Exit Options

Updated: Feb 17, 2023

Do you have plans for cashing out of your business through a company sale?

You have worked many years to grow the business and serve your customers. It is successful and generates a good lifestyle. Most of your net worth is tied up in your business. You have a well trained team of employees and a growing customer base. Now you are considering exit options.

table top with black post-it notes saying "succession planning" with wooden figures and arrows lined up like ticky tacky houses all in a row
Know the options to plan a successful business transition.

You may be thinking about:

  • Reducing your involvement in the day-to-day operations

  • A complete exit to start your next chapter in life

  • Reduce your concentration of wealth with a full or partial exit

  • Rewarding employees who helped grow the business

  • Invest proceeds to generate income for you today and generations to come

Which option should you choose to exit your business?

Understanding your priorities will help balance the PROS and CONS of your exit plan. This article will summarize the following four exit strategies:

  • Sale to Strategic Buyer

  • Sale to Private Equity

  • Minority Equity Investment aka Partial Sale to Family Office

  • Sale to Employees (ESOP)

Outright Sale: Private Equity or Strategic Buyer

If you want to maximize your wealth, consider a sale to a private equity (PE) firm or a strategic buyer. You have the option for an outright 100% business sale to a private equity firm or to a strategic buyer (usually a competitor). With an outright sale, you can achieve a full exit, meaning you get all your cash to spend or invest after the sale and paying taxes. And, with an outright sale you can completely exit, removing business risks from your life and start your next chapter.

Compare the pros and cons of selling your business to a private equity firm.

Alternatively, some buyers may ask you to stay on with a rollover of part of your equity and incentivize you with additional compensation if the company flourishes under a new buyer. Rollover equity is not a good choice if you want to walk away completely, but it may be a great choice if you want to diversify your wealth by selling a significant portion of the company. If you rollover equity, it is very important that you evaluate the new decision makers and decide whether you can ‘get in bed’ with them and work well together.

Compare the pros and cons of selling your business to a strategic buyer.

One of the downsides of a sale to a strategic buyer or a private equity firm is that there may be management or employee turnover after the sale. And, most private equity firms will sell the company again within 5 to 10 years. If you sell to a strategic buyer or a PE firm you are giving up decision making authority.

If you are considering an outright sale of your company, make sure to factor taxes and the payoff of debt into calculating how much cash you will have after the transaction. One of the benefits of selling today is that capital gains tax (in 2021) are at a historically low rate. Many experts think capital gains rates will increase in the near term.

Partial Sale: Family Office

Perhaps you love working in your company and want to keep growing it for the next 10-20 years. However, you recognize that most of your wealth and financial risk comes with owning and working at the company. There are several family offices that will consider allowing you to run your business indefinitely but provide you with a partial buyout of up to 50% equity today.

Family offices like stable well run businesses that generate steady income and aren’t subject to the whims of Wall Street noise. If you find a family office whose values and vision align with yours, that may be a good option to ‘take some chips off the table’. After you receive the cash, you can work with a financial advisor to reinvest in a diversified pool of investments.

Compare the pros and cons of selling your business with a minority equity investment sale.

It is important to work with your bank, attorney, and financial advisor to look at debt structure and debt guarantees before finalizing a minority equity sale.

One of the benefits of a minority equity sale is that you can continue to participate in the profits of the business for the equity you retain. The typical strings associated with a minority equity investment have to do with taking on lots of debt or making major strategic decisions. If you do sell part of the business to a family office, in the future if you desire a full exit, most family offices will be pleased to accommodate you when the time comes. The benefits of a partial sale to a family office may come with a lower sale price than if you sold to a strategic buyer or PE firm.

Partial Sale: ESOP

Another way to partially exit your business is to sell to your employees. This can be done with an Employee Stock Ownership Plan or ESOP.

Compare the pros and cons of selling your business to your employees with an ESOP plan.

The benefits of an ESOP include partial (or full) liquidity for you and the option to continue to be involved in the business. Rewarding employees who have helped take care of your customers and grow the firm may be one of your goals. For certain company owners, rewarding employees who may be like family could be your top priority. With an ESOP transaction, management can continue to own part of the business and participate in its growth and profitability while helping employees improve their own financial lives with equity ownership in retirement accounts.

An ESOP transaction can be more complicated than an outright sale as the selling shareholder(s) are often asked to take back a portion of the debt on the sale or retain equity for a period of time. So, for those wanting a full and immediate exit, this may not be the best choice. Our next article in this series ‘What will be your legacy’ further explores the benefits of an ESOP as an exit strategy.

If you are thinking about selling a successful business, there are many options available. It is important to consider the following criteria before getting too far down the road to a sale. 1. Is your goal to maximize cash today? 2. How important is it to take care of your employees? 3. Do you want to walk away from the business completely? 4. How much of your net worth is tied up in the business? 5. How much business risk and responsibility do you want in the future?

Final thought.

Selling a business can be one of the most important events in your life. If you, or a friend, is interested in starting a conversation about business exit strategies, the Peak Wealth Planning team can assist you.

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About the Author

Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.

Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.


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