Regardless of when or how you plan to exit, data indicates that having an exit strategy increases the odds your business will sell for optimum value. It is in your best interest to understand thoroughly—and well in advance of your exit—how each strategy affects you, your company, and your employees; only then will you be able to craft an effective exit strategy.
Below we outline the three exit strategies most effective for middle-market companies and describe the factors you must consider for each strategy. Examine both your short-term and your long-term goals as well as your timing to determine which strategy fits best.
Three Exit Strategies for Middle Market Companies
1. Strategic Buyer
A strategic buyer is an operating company within your value chain that acquires your company to capture synergies. A strategic buyer understands your business and has the infrastructure to manage your business operations.
|
|
Buyers
|
Strategic buyers are typically from your industry.
- Competitors
- Suppliers
- Customers
|
|
Percentage of
Business Sold
|
100%.
Strategic buyers are likely interested in a controlling interest only—in order to merge your operations with their own.
|
|
Timing to Receive Proceeds of Sale
|
100% proceeds at time of closing.
A sale to a strategic buyer is optimal for business owners in need of maximum liquidity.
|
|
Seller’s Role
Post-Sale
|
Negotiable.
Typically, you have the option to completely exit the business. You could be asked to stay on for a predetermined transition period, which would be a point of negotiation during the deal process.
|
|
Likelihood Company Culture Remains
|
Uncertain.
New owners likely will introduce their processes, ideas, and reporting structures—meaning there is no guarantee your company culture will survive.
|
|
Necessary for Successful Transaction
|
- Ability for the company to run without its current owner.
- Strong processes and financial controls in place.
- Strategic buyer that is the right cultural fit for your employees.
|
|
Advantages
|
- You retain the ability to exit your business without further involvement.
- Strategic buyers understand your industry and will take care of your customers.
- The buyer usually provides 100% consideration at closing.
- Strategic buyers might pay a premium for synergies.
- Your employees will have more opportunities in the larger merged entity.
|
|
Challenges
|
- The best buyer might be your competitor.
- Finding the right strategic buyer takes time.
- The transaction process could be slow, but the buyer’s industry knowledge will be helpful during the due diligence phase.
- Such a transaction could expose company information and trade secrets to competitors. Even though you will be protected by an NDA, there is still risk.
- Your company name and culture might be lost in the merger.
|
2. Financial Buyer
A 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:
- A Platform Investment is a financial buyer's initial investment into a specific industry or market.
- An Add-On Investment compliments an existing platform investment (company), and the financial buyer intends to merge it with the acquired company to generate synergies.
|
|
Buyers
|
Institutional Investors
|
|
Percentage of Business Sold
|
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.
|
|
Timing to Receive Proceeds of Sale
|
Depends on how your company fits into the financial buyer's investment portfolio:
- Platform investment: substantially all proceeds at closing, except for the reinvestment amount. A financial buyer might require a seller to reinvest some of its proceeds into the new company.
- Add-on investment: 100% of proceeds received at closing
|
|
Seller's Role
Post-Sale
|
Depends on how your company fits into the financial buyer’s investment portfolio:
- A platform investment typically requires you to remain in a management role and continue to operate the company.
- An add-on investment could be more flexible. You likely will be required to remain with your company for a transitional period while the two companies merge.
|
|
Likelihood Company Culture Remains
|
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
|
- Solid management team
- Strong market position
- Sustainable competitive advantages
- Favorable industry and company outlook
|
|
Advantages
|
- Financial buyers typically focus on their industries of expertise to bring
- their knowledge and industry contracts.
- Financial buyers are well-versed in the deal process, so the transaction
- tends to be quicker.
- You will maintain day-to-day operational control.
- Financial buyers focus on growing the company, resulting in additional
- return on reinvestment.
|
|
Challenges
|
- If synergies with your company do not exist, financial buyers might offer a lower price than strategic buyers would.
- Financial buyers often use excessive leverage to finance the transaction.
- Financial buyers focus on maximizing short-term profits, possibly at the cost of long-term value beyond their investment horizon.
- Financial buyers might need to be educated on your industry if your company is a platform investment.
|
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.
|
|
Buyer
|
ESOP trust.
An ESOP trustee oversees the ESOP trust. The trustee retains legal counsel and a valuation advisor as part of the ESOP team.
|
|
Percentage of
Business Sold
|
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.
|
Timing to Receive Proceeds of Sale
|
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.
|
|
Seller’s Role
Post-Sale
|
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.
|
|
Likelihood Company Culture Remains
|
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.
|
|
Necessary for Successful Transaction
|
- Solid management team
- Knowledgeable valuation expectations
- Understanding of ESOP structure and requirements
- Right ESOP trustee and team
|
|
Advantages
|
- An ESOP provides the greatest flexibility in percentage of company sold.
- An ESOP provides significant tax benefits to both the seller and the company.
- An ESOP is the exit strategy type most likely to ensure the company culture’s survival.
- The transaction aligns the company’s and employees’ values.
- The transaction process is efficient.
- The transaction does not expose company information to competitors.
|
|
Challenges
|
- You will not receive any premium for synergies.
- You might be required to stay on for a transitional period.
- The transaction requires a minimum number of employees (typically >20).
- You receive cash at closing, with some proceeds provided over time.
|
