Like every other business effort, planning and then executing a selling strategy for a business can mean extra dollars in the seller's pocket.
In Exiting Your Business, Protecting Your Wealth (Wiley, 2008), attorney and former wealth manager John M. Leonetti presents a framework that allows business owners to customize their exit plans, helping them analyze their financial and mental readiness to move on. He shows how to choose advisors; how to value the business; and how to grow it with the exit in mind, if that’s the best plan for the moment.
“Believing that an exit strategy is simply the sale of your business is a major trap to avoid,” writes Leonetti.
At the heart of the book is an in-depth discussion of the five key exit options available to business owners. Leonetti explores the pros and cons of each option, helping owners decide which is best for them. Options include:
*Selling the business – Leonetti reveals that only 20% of privately-held companies are able to sell to outside buyers. The upside of selling is that it’s the highest-value exit. The downside for many owners, though, is that walking away from a company that took years to build and has become integral to one’s life is painful to do. Moreover, the continued income and benefits of ownership are lost, while the taxes and fees generated by the sale often drastically reduce the amount of money the owner finally receives.
*Private equity group recapitalizations – This option allows the exiting owner to retain operational control through an employment agreement, while selling a majority of the business to others. Although the owner may lose strategic and financial control, he or she does continue to receive income and participate in the future value of the business when it is later resold.
*Employee Stock Ownership Plans (ESOPs) – This is a powerful and flexible tool for the business owner who is not ready to give up control, but would like some diversification and liquidity today. Leonetti explains how ESOPs can be customized; combined with other options; and/or implemented over several years to meet an individual’s needs.
*Management buyouts – This is an excellent option for business owners who have saved for their financial futures and want to pass on the business to their management team. Leonetti explains that the success of this option is highly dependent on the circumstances of the individual business and of the people involved. He presents a thorough explanation of the ways that a management buyout can be structured.
*Gifting programs – Some business owners are not interested in extracting value from their companies. Instead they wish to give their businesses to family, employees, or charities, while limiting tax liabilities. Leonetti presents a clear discussion of how to implement these various gifting options.
Once exit options are understood, business owners also need to know about deal structuring and taxes. Leonetti warns, “It does not benefit an exiting owner to increase the selling price of a business through tough negotiations only to give back those gains to higher tax rates due to structuring that favors the buyer.” The financial objective of exiting a business is not necessarily about achieving the highest price, but rather about achieving the greatest sum total of all payments for the business. Leonetti shows how to achieve that goal.
Most entrepreneurs spend their time focusing on the day-to-day issues of running and growing their companies, giving little thought to exit strategies. Yet it’s never to early to start planning for the future.