If You Want to Get it Right, Choose an Exit Path Early

How you exit your business may be one of the most important decisions you make in your life. Each path has a different set of actions required, timeline to complete, advantages and disadvantages. A business owner must think through these paths to determine what is the right choice for them and their business. If a business owner knows this path several years in advance of the exit, it allows the time to develop the strategy and actions required to exit they way they want.    

Let's take a look at some of the paths you can take to exit a business:

1.  Liquidation - You will set a date, close the business, sell the assets and walk away with the proceeds. This can be the simplest and easiest way to exit your business. The planning for liquidation is mainly around making sure you have completed your obligations to customers, have the cash available to pay suppliers and employees, determining what assets will be liquidated, and how they will be liquidated. Liquidation often has the lowest returns, but in businesses that are difficult to sell or don't offer good potential for new ownership, it may be the best choice. This can be an appropriate path for someone who wants to "be done" with the business quickly, work until they are physically unable, or don't want to take the time and effort to sell their business. Liquidation is often the simplest and quickest way to exit a business.
2. Succeed the business to family members (Succession) - Many family owned businesses are passed to the next generation or other close family members. This is a popular and rewarding path for many business owners that comes with its own special challenges. This choice may require many years to complete. It depends on the age and abilities of the next generation family member. In succession, the goal is to continue building the value through the generational transition. This can be very difficult to accomplish if the current business owner needs to exit in a short timeline. Outside advisors can help with this transition if the timeline does not allow proper skill development of the next generation family member. Succession is often a popular choice, because the seller can retain a decreasing role in the company for an extended period of time.  Another advantage to succession is the assets of the business can be transferred over a longer period of time, potentially reducing the taxes.
3. Sell internally to employees - Selling your company to employees is often a choice if there are no family members to assume the business. This path has a timeline much like succeeding the business to a family member.  A critical step to this path is making sure the employee can successfully operate the business. You may need to utilize a trial period so you can assess the ability of the employee to operate the business before you complete the sale. Selling a business to an employee is typically accompanied by significant owner financing. The advantage to this is you can gradually transition out of the business and can often times get a higher value for the business. This can also reduce the tax liabilities from the transaction. The disadvantage, with any seller financing is you may find yourself coming back in to operate a failing business. The business owner much ensure that the employee has the skills to be successful. This is critical.
4. Selling to existing investors - Many businesses are sold to existing investors because they are familiar with the business and see the potential.  One advantage is the seller may significantly reduce the diligence required and time to complete the sale.  A potential disadvantage is that the investor will be looking to "buy low and sell high", so you might not realize the value you could obtain from other options.  An investor purchase may also have similar challenges of selling to an employee if owner financing is involved. If the investor can significantly reduce the seller financing, it may be more attractive than other options.
5. Selling on the open market - Profitable and well run businesses are hot commodities. If you build a profitable and well run business it can sell quickly and for a good value. A disadvantage to selling on the open market is this path is by far the most demanding. Potential buyers are not going to be familiar with the business and they will require significant due diligence. They will be trying to learn about your business, uncover potential issues, and properly discount for unknowns. during the due diligence period. Diligence is time consuming and very frustrating when it ends with the potential buyer walking away. Preparation is key to selling your business on the open market. You need to uncover, fix or mitigate all the issues you can prior to anyone proceeding with diligence. If you don't, your best offer could walk away quickly.

Often times the path to exit takes years to execute. Once you make the choice you can begin on develop the strategy and plans to realize your goals. Owners have to start planning early if they want to get it right.

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 Damon Pistulka is a Managing Partner for Cross Northwest. 

Cross Northwest is a M&A Advisory/Business Brokerage/Valuation/Management Consulting Company

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