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The 4 Paths to Business Exit Planning

Posted by Dixon R. Howell | Apr 21, 2016 | 0 Comments

Most business owners hope to one day reap some reward and benefit from their labors by selling their business. Common to all sales are three key questions: Who's the buyer? What's the business worth? How will the purchase price be paid? Business exits normally follow one of the four following paths:

1. Sale to the Kids . If the kids are involved in the business, selling to them will preserve the culture and legacy of the business and perhaps even allow the seller to stay involved. Because it's his family, the seller will also probably be willing to reduce the stress on the buyers by being more flexible on the purchase price and the payment terms. However, if all the kids are not involved in the business, perceived favoritism could create family friction. In addition, unless the kids share the seller's business skills and entrepreneurial passion, there is a real risk of subsequent business failure.

2. Sale to Employees . A sale to trained employees (who may already have a minority ownership interest in the business) increases the chances of on-going business success and, therefore, the seller's payment prospects, since the purchase price will most probably be paid from future profits. Existing employees will also probably maintain the business culture and legacy. The purchase must be carefully structured to ensure that future business earnings are sufficient to both pay the purchase price and enable the employee-buyers to maintain their standards of living. The greater the purchase price, the greater the risk of failure and the likelihood that the seller may have to retake control and attempt to rebuild a business that has been run into the ground.

3. S ale to a Third Party . The objective and big advantage of this path is for the seller to get cashed out to eliminate all risk to him of future business failure; at the very least, the seller wants to get enough money up front so that any at risk debt taken back is “gravy.” In a hot market, the seller may even be able to sell the business for more than it's worth on paper. This path also avoids sibling issues but does put the continuation of the culture and legacy of the business at risk and may jeopardize the ongoing employment of loyal employees. If the seller takes back substantial debt, the risk of future business failure and the need to retake and rebuild is a major concern.

4. Business Liquidation . This is the worst path. No Buyer—kids, employees or third parties. The seller sells the assets, collects the receivables, pays the creditors (including the IRS) and pockets any remaining proceeds. If the business is a service business, with the value of the business closely tied to the personality and talent of the seller, there may be little or no “excess” or “goodwill” value to be realized.

Business Exit Planning should begin early. Start the process by assembling an exit planning team which can consist of a lawyer, accountant, financial planner, appraiser banker, and business broker. The more time you devote to planning and choosing your exit path, the greater the likelihood that the path you choose will be a successful one.

About the Author

Dixon R. Howell

Dixon Howell received his Bachelor of Arts degree, cum laude, Business Economics and Accounting, from Claremont McKenna College. He obtained his Juris Doctor degree from the University of California, Berkeley (Boalt Hall School of Law).


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