There are many reasons a middle market business owner might decide he or she needs an exit strategy. But a successful and lucrative business exit, one which allows the owner to reap the maximum value from the company, requires careful consideration of potential exit strategies and usually years of preparation.
It is wise to begin business exit planning early on, even if the business owner intends to hold on to the company for a few more years. Business opportunities and risks, changing economic conditions, and the chance that the business owner might unexpectedly need or want capital for personal or investment purposes, all make it wise to start planning early. That way, that the owner is not forced to sell when he or she is not fully prepared, or when market conditions are less than ideal.
In fact, not having a robust exit plan is one of the top five reasons that many business owners do not sell, even when it is in their best interests.
Table of Contents
Motives and Strategies
Here are some of the top reasons that owners say determine their interest in an exit:
Retirement. The Baby Boomer and Gen X generations are aging and many owners in those groups are ready to pass their businesses on to others. They want to free up time to meet their personal goals, and to secure adequate retirement income to ensure their financial independence and support their lifestyles.
Risk Management. Running a middle-market company, generally defined as one with $100 million or less in revenues, can be tricky. As Table One from the U.S. Bureau of Labor Statistics shows, only 50 percent of companies are still in business after five years, and only a quarter are going concerns after 15. Exits from companies in particularly competitive industries are a way for founders to reduce their concentration risk by diversifying their holdings.
Serial Entrepreneurship. Owners often decide to seek out new opportunities and exit all or part of their initial company to generate more money and time to launch new ones.
Unanticipated Financial Needs. Personal issues, such as illness, divorce, or other family obligations might force a business owner to raise capital through an exit. In these cases, an exit strategy acts as a personal contingency plan.
Table One: Survival rates of establishments, by year started and number of years since starting, 1994–2015, in percent
| NUMBER OF YEARS IN BUSINESS | SURVIVAL RATE |
| 1 | 78.1% |
| 2 | 68.2% |
| 3 | 60.3% |
| 4 | 54.3% |
| 5 | 50.0% |
| 6 | 46.4% |
| 7 | 42.3% |
| 8 | 39.0% |
| 9 | 36.8% |
| 10 | 34.3% |
| 15+ | 25.0% |
Source: Bureau of Labor Statistics
Some Common Exit Strategies
Here are four common exit strategies. Table Two lays out some of the pros and cons of each strategy.
- Leaving a business to a family member
- Selling to the management team or other current employees
- Selling to a financial buyer like a venture capital or private equity firm
- Selling to a strategic buyer pursuing a revenue- or synergies-driven M&A strategy
Table Two: Pros and Cons of External Exit Channels and Internal Exit Channels
| EXTERNAL EXIT CHANNELS | INTERNAL EXIT CHANNELS |
| Financial buyersStrategic buyers | RecapitalizationFamily membersCo-owner(s) or ManagementEmployees (ESOP) |
| Pros Generally, gets the seller the highest possible valueDiversification of family’s wealthPost-sale financial and leadership resources | Pros Greater control over legacy, timing and termsIncome and estate tax savings opportunitiesLimited due diligence and time required to close |
| Cons The time and cost of marketing, due diligence and closing a transaction makes it more difficult to reach financial goalsLimited control over post-legacy value in the future in cases where owners want to remain involved | Cons IRS and tax courts determine the tax implications, and therefore the value, for family and ESOP transfersValue received is often less than the actual market valueBuyer’s financial resources are usually limited |
Source: Divestopedia
Key Exit Planning Process Objectives
There are some goals that almost all companies need to reach in order to achieve a successful transition during the exit process. Some of these can take years to accomplish, and all require careful proper planning. Here is a checklist of some of the most important.
- Devise a Succession Plan. Owners need to carefully consider their business, personal and financial goals in order to choose an appropriate succession strategy. Then they can choose among options such as these:
- Owners of family businesses may wish to leave these companies to children as part of a family legacy.
- An owner who prefers to simply sell a company to secure the highest price should consider a financial or strategic buyer.
- If the owner wants to remain involved after the sale, he or she might negotiate an earn-out provision.
Determining the owner’s preferences and goals for succession well in advance of a sale will allow the company, rather than potential buyers, to remain in control of the process.
- Hire a Top-Quality Professional Management Team. Middle market companies that start out as small family businesses often retain unfortunate residue of their origins in terms of mediocre family members filling important positions. They might even sit on the board, or in value-draining sinecures. Buyers will not stand for this. Owners must get rid of unqualified employees wherever they find them, fix or eliminate underperformers, and ensure they have a deep bench of quality managers in important positions, who will be willing to stay on after the sale.
- Understand and Enhance the Key Value Drivers. Owners need to identify their company’s key value drivers and generate action plans to develop them as much as possible. Buyers will want to see that the company has a clear vision of how the business can grow over time.
- Reinforce your Competitive Position. The owner’s ability to secure a valuation based on an attractive multiple depends to a large extent on how the company stacks up against rivals. Your company’s bottom line growth, control of costs, and increase in revenues in the years leading up to your exit will be crucial to obtaining your business valuation goals.
- Develop a Credible Financial Track Record. Buyers will demand several years’ worth of GAAP-compliant financial statements, along with detailed and credible forward earnings estimates.
- Investigate the Tax Consequences of Exiting the Company. You need to carefully consider the long and short-term tax implications of the strategy you choose.
These crucial elements should be planned and executed with the assistance of a high-quality team of advisors to ensure that you are well-prepared to act when the time is right.