A business owner may have several options in transferring the business. The tables below describe the different types of transactions to insiders as well as transactions involving third parties.
|Inside Transactions||Outside Transactions|
|Intergenerational Transfer||Sale to a Third Party|
|Management Buyout (MBO)||Recapitalization (Recap)|
|Sale to Existing Partners||Orderly Liquidation|
|Sale to Employees (ESOP)|
The owner transfers the stock to direct heirs, usually children. 50% of business owners want to exercise this option – in reality, only about 30% actually do so.
|Business legacy preservation||Family dynamics|
|Planned||Lack of funds/Illiquid buyers|
|Lower cost||Lower sale price|
|More control||Key employee flight risk|
|Less disruption||Tradition may outstrip good strategy|
|Higher buyer/seller motivation||Path of least resistance – but not always a path to growth or success|
Management Buyout (MBO)
The owner sells all or part of the business to the company’s management team. Management then uses the assets of the business to finance a significant portion of the purchase price.
|Highly motivated buyers||Threat of flight (coercion of owner)|
|Preserves key human capital||Illiquid buyers / Heavy Seller Financing|
|Planned||Lower price and unattractive deal terms|
|Can be combined with private equity for additional growth resource||Managers are not always good entrepreneurs|
Sale to Partners
The success of this option may be closely linked to the existence and quality of a buy-sell agreement. It is of course, not an option for single owner businesses.
|Planned||Lower sale price|
|Well-informed buyers||Potential discord|
|Controlled process, if buy/sell agreement in place and funded||Competency gaps?|
|Lower transactions costs||Realization of proceeds is often slower|
Sale To Employees through an Employee Stock Ownership Plan (ESOP)
Generally suited for a gradual exit where the Company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees.
|Business stays in the “family”|
Shares purchased with pre-tax dollars
|May be more complicated and expensive than other options|
|Taxable gain on ESOP shares may be deferred||Requires securities registration exemption|
|ESOP is an employee benefit||Company compelled to buy-back shares from departing employees|
|Often causes employees to think more like owners||Generally suited for a gradual exit|
Sale to a Third Party
The Owner sells the business to a strategic buyer, financial buyer, or private equity group through a negotiated sale, controlled auction, or unsolicited offers.
|Higher price (highest of the options)||Long process (9-12 months)|
|More cash up front||Distraction and loss of focus|
|Walk away faster||Privacy concerns|
|Stability of deal terms||Emotional for owner|
|Business refresh (growth, new energy)||Post sale tie-downs|
|Cost-effective||Highest cost option (highest benefit)|
|Breaks deadlock at management level with family||Very complex – approx. 1,000 professional hours Can be difficult to close|
Essentially this option brings in a lender or equity investor to act as a partner in the business. The Owner can sell a minority or majority position in the business although most times, the equity partner wants control of the business.
|Allows partial exit||Continuing accountability to partners|
|Reduces owner risk – diversifies assets||Loss of control|
|Provides growth capital||Culture shift|
|Second bite at the apple||Slow transaction|
|Works well with other exit options||Expensive relative to benefit|
The business is shut down through a simple, quick process. This makes sense if asset values exceed the ability of the business to produce income required to support an investment.
|Good option when asset value exceeds value of going concern||Uncertain proceeds – no guarantee No compensation for goodwill|
|Sum of the parts are greater than the whole|
Efficient way to exit
Stigma of “closing” the business.
|May be less expensive than other exits||Damage to employees and jobs|
May be higher tax (C-corporations)
Execution with Integrity