Exit Options for Business Owners

Apr 12, 2021

Business owners who are seeking to sell all or a part of their business have options available to them both inside and outside of their company. Owners should keep in mind how each option will impact their ability to sell all or part of their business, how long a transaction might take, the impact on their business after the sale, and the value they will get through the transaction.

Internal Exit Options

Family owned or closely held businesses often place a high value on keeping the business in the family. There are several options for businesses considering this path. 

Family Succession – Transitioning the business to a family member can be an attractive option because the process can be more flexible as to the structure and timing. The seller and buyer should closely evaluate how much of the transaction will be funded with equity and how much with debt (external or seller’s note) and how that will impact the future cash flows of the business.

Sale to Management – Often a key member of the management team will want to buy the company using a “Leveraged Buyout” or LBO. This purchase can be financed with traditional debt, seller’s note, or a combination of the two. These transactions can offer favorable terms and flexible timing to the seller. However, the seller should carefully consider the impact of this debt on the future cash flows of the business.

Employee Stock Option Plan (ESOP) – Sometimes owners wish to sell the company to the employees of the company and may opt to use an employee benefit plan and trust to hold and allocate shares to employees. (Adamy will cover this option in more detail in our next blog post.)
In all cases, there should be a focus on the impact of the transaction on debt and cash flow, especially if the buyer intends to use external financing. Doug Holtrop, Senior Vice President, Corporate Banking, of Mercantile Bank, explains, “When looking at funding the purchase of a business by a family member or member of the management team, the bank will want to make sure the business can generate a level of cash flow that allows it to service the debt created by the purchase along with a margin for volatility in future earnings.”

External Exit Options

Business owners who do not see an internal exit as an option have external options for an exit.

Strategic Buyers – Strategic buyers may work in the same industry as the seller’s company, such as a supplier, customer, or competitor. They may offer a higher valuation and often better understand the seller’s company or industry, offer opportunities to grow the company after the sale, and/or may maintain ownership for a longer period.

Private Equity (“PE”) – PE funds are groups of individual and institutional investors that invest capital for a specified period before the fund is expected to sell its holding and return money to the investors. PE can move quickly on transactions. “PE can be a great option for business owners who aren’t ready to fully exit and are looking for a partner to help them grow their business. Choosing the right equity partner can not only bring capital to the table, but also an entire toolbox of business best practices that can assist an entrepreneur in taking their business to the next level.” says John Pollock, Managing Director of LV2 Equity Partners, a private equity group based in Grand Rapids, MI. One important thing to note is that PE funds often require sellers to maintain (or “roll over”) a portion of their ownership.

Tribal Economic Development Companies (“EDC”) – Native American Tribes have become more active investors over the last decade. EDCs invest directly into companies, typically acquiring the entire company or majority ownership for a very long-term hold. Tribal EDCs may invest in operating companies, real estate, and/or provide passive capital. For example, Waseyabek Development Company, an EDC in Grand Rapids, Michigan that manages the Nottawaseppi Huron Band of the Potawatomi’s non-gaming economic development activities invests in companies with intent to hold for seven generations.

Special Purpose Acquisition Company (SPAC) – SPACs companies are formed for the sole purpose of acquiring a company. That company might be known when the SPAC is formed, or the SPAC might be allowed to pursue a “yet-to-be-determined” company. SPACs can offer a higher purchase price to a seller, can close quickly, and often bring more equity to the transaction (less debt). There are significant regulatory requirements that come with a SPAC.

In all cases, owners should work with their advisors to evaluate their goals in selling and then develop a plan to target buyers that will allow them to achieve those goals.

Key Takeaways

    • Business owners have options for exiting their businesses, both internally and externally.
    • Owners should understand how the type of buyer impacts timing, structure, financing, value, and the company performance after the sale.
    • Owners should determine their goals in a transaction to help them choose which type(s) of buyers might be the most suitable.
    • wners should have an experienced team of advisors to assist in the transition.

Additional Reading

Exit Planning Series

WH and Adamy Valuation began a series called “Tactical Tuesdays” in 2020 in response to the impact of the COVID-19 pandemic on our clients and business partners. The goal of “Tactical Tuesdays” was to provide up-to-date information that would allow leaders to make tactical decisions to run their business. As COVID (hopefully) winds down, the Tactical Tuesdays focus is shifting to address longer-term issues. Over the next several weeks, DWH and Adamy will be publishing a series of blog posts around exit planning for business owners.