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 BuyerA 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. |
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Buyers
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Strategic buyers are typically from your industry.
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Percentage of
Business Sold
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100%. Strategic buyers are likely interested in a controlling interest only—in order to merge your operations with their own. |
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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. |
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Seller’s Role
Post-Sale
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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. |
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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. |
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Necessary for Successful Transaction |
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Advantages
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Challenges
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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. |
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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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