Exit Strategy Consulting & Family Business Exit Planning

June 24, 2021Insights

As an entrepreneur, exit planning is crucial to your family’s financial future. If you own a family business, the stakes and emotions run even higher. Your exit is the final act that determines your legacy and the foundation for your next chapter in life, whether it’s starting a new venture, retiring, giving back to your community, or simply enjoying the little things that you might be missing while you’re consumed with work. Whatever your vision and reason for exiting may be, recognize the difference between a wish, a dream, and a plan.

Exit Planning: A Look at the Options & Avenues

In exit strategy consulting—or Exit Engineering, as we call it—the important word to remember is readiness. While each exit is unique, all exits require three key components of readiness: owner readiness, business readiness, and market readiness. Read briefly about each in the links to get a better understanding of true exit readiness so we can evaluate these potential exit paths through the lens of what matters most to you and which route will get you where you want to go.

Liquidation

The word might have negative connotations, but liquidation is a completely viable exit strategy for businesses that might not be so easily sold. It’s not a failure at all, but rather, a simple and successful exit from a business that gave you freedom, flexibility, opportunity, income, and relationships. Liquidation means selling off the business’ assets and real estate, paying any final debts and taxes, closing the books and accounts, and walking away with the remaining funds. Liquidation is much less complex than a transaction and eliminates any future liability by taking a buyer out of the picture.

Annuity

If you don’t necessarily want to sell your business but no longer want the responsibility of running it, consider turning the business into an annuity. You can do so by hiring someone to take the role of CEO. We recommend also appointing a board of directors to whom the CEO reports. You’re then relieved from the day-to-day operations, while receiving a monthly income as the owner. It’s a creative solution enabling you to hold on to the business, be involved in some (or none!) of the decisions and steer your legacy without forcing an unfavorable sale.

Inside Sale – Family Member(s)

An inside sale is a sale to someone who is familiar with the business. In family businesses, transactions often happen between generations of family members. But keep in mind that sharing a last name doesn’t automatically make someone the best buyer and future leader for the family business. In both the decision and the transition, we recommend working with a family business exit strategy firm like Exit Consulting Group to look out for the business’ best interests from an objective viewpoint.

Inside Sale – Key Employee(s)

When you’ve put in the time and sacrifice to build a stable business, the reality of exiting can bring a world of emotions. An inside sale to one or more key employees can help make your exit feel less final and more like a passing of the torch to the person or people who have been working for you for years or decades. Inside sales, whether to family members or key employees, take many shapes and forms, including management buyouts, Stock Appreciation Rights (SAR), Employee Stock Option Plans (ESOPs), and other strategies to discuss with your exit consultant.

Outside Sale – Strategic Buyer

If you have a salable business and do not see a candidate for an inside sale in your family and/or company, we’re looking at an outside sale to a person or company who sees value and opportunity in purchasing your business. There are many different buyers to recognize, each with different motivators. Strategic buyers, for example, value a business based on the return they expect from an acquisition.

Strategic buyers typically make very attractive offers, with the sale price often contingent on the success of the business after the sale. These buyers are willing to pay more because they believe it is more efficient and cost-effective to take over an existing company than to build a new business from the ground up.

Outside Sale – Financial Buyer

A financial buyer is a sophisticated, professional buyer such as a financial institution, insurance company, or private equity firm. Generally, financial buyers have large pools of money. They see businesses solely and coldly as assets, deciding to buy or not buy a business based on the rate of return the company may generate. Financial buyers usually focus on businesses with at least $10 million in revenue and $1 million in EBITDA. They want to see a strong management team in place, strong financials, growing revenue, and a profit.

Outside Sale – Individual Buyer

When you officially place your business on the market, you might also receive inquiries and offers from private, individual buyers who want to own and operate the business themselves. An individual buyer will likely require financing but can prove to be an unexpectedly perfect fit if the stars align. Selling your business to someone who needs and wants it to succeed for their own best interests can give you pride and peace of mind in knowing your company and employees will continue on the path that you and the new owner discuss during negotiations.

When Do You Need an Exit Strategy?

Exit planning is a delicate balance of time, money, and energy. How much time do you want, how much money do you need, and how much energy do you have? What is the order of priority among the three? For example, if you are feeling burnt out in business, your energy becomes the main factor, and so you might consider taking less money to sell the business sooner. If you were still relatively happy running the business, you might be inclined to put more time and energy into growing it for a larger sale price later on. The sooner you start thinking about your exit, the better. There’s a school of thought in exit strategy consulting that says owners should have the exit in mind from the start and build the business to sell it regardless of their intentions down the line.

Family Business Exit Strategy: 3 Quick Tips

All business exits are emotional, but family business exits can be even more so. The pressure of sustaining the business meets the dynamics of family relationships and different ideas for both preserving and expanding the legacy. In family business exit planning, remember the following:

1. An Exit Strategy is Essential

Business planning intertwines with succession and estate planning. The conversations might not be comfortable and enjoyable, but they will help to ensure your family has the information and instructions to continue both in the business and in life when you meet the inevitable exit that we all make eventually.

2. Family First Means Business First

You’ve heard the mantra, “family first.” In family business, it’s actually the opposite. Take care of the business first, and the business will take care of the family. That might mean making difficult decisions and possibly upsetting family members to position the business for success.

3. Start Now

On average, it takes 9 to 12 months to sell a business assuming it is well- prepped. To get to that point and reach that pivotal moment when you are truly, emotionally ready to transition with confidence, expect to spend 3 to 5 years mapping out the details, improving the business, and taking your exit strategy consulting in stride with your busy life. This all applies not just to a family business, but any business.

Exit Engineering requires commitment and candor—from you and from us. We will mirror your passion for your business with purpose for your exit, combining business logic with emotional intelligence to realize your win.