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A well-planned exit strategy can significantly impact your financial security, company's future, and employee well-being. This crucial step, often considered alongside succession planning, ensures a smooth leadership transition and protects your legacy. This guide explores three common exit strategies for mid-sized businesses: strategic buyers, financial buyers, and Employee Stock Ownership Plans (ESOPs).
Before diving into specific exit strategies, consider your succession plan. Who will lead the company after your departure? A well-defined succession plan can make your company more attractive to potential buyers. Examining both your short-term and long-term objectives will help you choose the path that best positions your company for a successful future.
2. Financial BuyerA financial buyer is an investment fund who acquires your company to realize a return typically over a five to seven-year investment horizon. A financial buyer makes two types of investments:
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Buyers
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Institutional Investors
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Percentage of Business Sold
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Majority or Minority
In most cases, a financial buyer seeks a controlling interest; however, certain groups invest in minority positions of companies seeking growth capital or a financial partnership.
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Timing to Receive Proceeds of Sale
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Depends on how your company fits into the financial buyer's investment portfolio:
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Seller's Role
Post-Sale
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Depends on how your company fits into the financial buyer’s investment portfolio:
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Likelihood Company Culture Remains
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Uncertain You might be able to reinforce your company culture during the investment period, but its survival after your complete exit is uncertain. |
Necessary for Successful Transaction
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Advantages
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Challenges
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3. Employee Stock Ownership Plan (ESOP)In an ESOP the stock of your company is purchased by a trust. Your employees become beneficiaries of the ESOP trust.
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Buyer
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ESOP trust.
An ESOP trustee oversees the ESOP trust. The trustee retains legal counsel and a valuation advisor as part of the ESOP team.
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Percentage of
Business Sold
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Majority or minority.
ESOPs provide the most flexibility among the three exit strategy types; any percentage can be sold. Either bank or seller financing could provide the access to liquidity that you seek.
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Timing to Receive Proceeds of Sale
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Negotiable.
Commonly 30%-50% at closing and then the remainder over 5-7 years.
ESOPs are commonly financed with bank financing and seller financing, meaning a note is issued to you for some percentage of the total proceeds at the time of closing. The principal of the note is paid to you over a negotiated term, plus interest. This structure is ideal for owners looking to retire in the next 3-5 years and to preserve the culture and legacy of the company.
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Seller’s Role
Post-Sale
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Seller’s decision.
An ESOP provides great flexibility in determining your future tenure with the company but requires a strong senior management team for you to exit completely.
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Likelihood Company Culture Remains
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Greatest assurance that your company culture remains.
Your company name will stay on the building. You can rest easy knowing your seasoned senior managers—the people who really understand the business—will continue to take care of employees. Because the employees have a beneficial interest in the company, each employee focuses more on the company’s success, which has been shown to result in higher productivity.
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Necessary for Successful Transaction
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Advantages
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Challenges
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Whether you are looking to exit today or in the next five years, it is never too early to start planning. PCE can work with you to determine what your company is worth today and develop strategies to increase its value for tomorrow. Effective planning can help you achieve your business goals and maximize sale proceeds.
Every business owner eventually exits his or her business, but not all owners are adequately prepared for that moment. Contact PCE today to prepare for your exit and to learn how we can help you maximize results.
Visit our Exit Planning Library to find additional resources to help guide you through the exit planning process.