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)

Intergenerational Transfer
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.

Continuity Distraction
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.

Less disruptive Distraction
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

Orderly Liquidation
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)