Which exit will you choose?

How do I create an exit plan?

There are essentially two paths you can take when it comes to transitioning the ownership of your business – an internal transfer or an external transfer.  Each path offers several options.
 
How do you determine which one is right for you? For a family business owner, few questions require as much soul-searching as the issue of whom to transition ownership to when it’s time for you to retire.
 
That’s no surprise.  Your business has likely consumed your days and nights, let alone a bunch of weekends.  For years, you have focused on building and nourishing your business to be self reliant and continue its legacy.
 
Getting out of your business will end up being much harder than it was for you to get in.  This has become your baby, and you likely have a lot of net worth tied up in the business.  There are a myriad of implications including family, financial, personal (as in ‘what is next for you), taxes, let alone leaving the business in good hands to continue its legacy and buy you out.
 
It’s hard to know where to start with so many moving parts.  Peter Chrisman, co-founder of the Exit Planning Institute, likens the process of ownership transition to a three legged stool:  leg one ensures you have maximized the value of your business; leg two ensures you are personally and financially prepared; and leg three ensures you have a plan for the third act of your life.  If one of the legs is weak or missing, the stool topples, along with your exit plan.
 
Too often, owners of closely held businesses fail to adequately plan for ownership transition,  or plan too late. This limits the choices available, and the business owner may have to settle for a solution that is less perfect. By planning early, owners have more options available and can begin taking steps to put a plan in place.
 
Here are the ownership transition alternatives that exist for a family business:
 
Inside Transfer
·      Transfer to a family member
·      Management buy-out
·      ESOP (Employee Stock Option Plan)
·      Sell to other shareholders
 
Outside Transfer
·      Sell to a 3rd Party
·      Sell to a Private Equity Group (Recapitalization)
·      IPO (Initial Public Offering)
·      Liquidation
 
These alternatives move the ownership in very different ways; however each has its own benefits and limitations. The alternative that is right for you can only be determined after careful analysis of several factors with your transition advisors.