A liquidity event is a merger, purchase or sale of a business. In other words, this is called your exit strategy, and typically converts the equity held by the owners into cash. Owners and investors will generally have to plan a strategy in advance, and it is completely reasonable, actually advisable, to have a rough idea on how you want to exit a few years in advance. Decisions you make today can impact the options that you will have to exit. You often hear business owners complain after they exit, that they wish they had planned ahead and known all the options available. We provide a list of exit options below, with the goal of getting you to start thinking about how you want to exit. Each alternative should be evaluated differently and must be considered in the context of your overall objectives. Talking to a sell-side advisor can help you decide your final choice.
If the main goal of the sale is to raise funds for future growth, a sale to a strategic buyer could be perfect. Generally, this means selling to a larger public company, that is interested in investing in the industry in which you operate. This sale can often mean you will leave the company following the deal, or at least set a planned leave date in the future. More so, this type of sale tends to be on the higher end of the purchase price range due to synergies (cost savings because of similar business operations). The main downside to this sale option is that firms often try to exploit these perceived synergies, and the result is often staff redundancies.
While the price set in a financial buyout tends to be slightly less than a strategic buyout, due to the lack of synergy benefits, they tend to be decisive and quick to respond. Investment firms have to make their investment decisions based on a set of mandates, and they will happily share these with you. They are generally made based on return on investment (ROI) calculations over a 3 to 5-year horizon. Most firms will also want an exit strategy in the years to come, so keep this in mind. With that said, there is a growing number of “invest and hold” institutions that will hold a company for its long-term stability and dividends.
Selling to your co-founder is often the easiest exit. Like any relationship, partners drift apart over time and start to have different views. If one of you wants to leave, and the other wants to stay this is often the easiest conversation to have. More so, this person is already involved and committed to the company and can provide some confidence in ongoing success. The process is flexible, which allows you to think about a gradual sale or a quick handover, depending on your needs and risk tolerance.
This is actually very common and often linked to the option above. Selling to a daughter, son or sibling allows you to keep the business in the family. Depending on your State, it can also lower your tax liability when you transfer some or all the business as a gift.
Similar to selling to a family member, selling to trusted senior employees ensures the business is run by someone who has already invested time and effort into the company. Often this leads to great success after the purchase, which will be great for you if you keep some equity. This is often preferred when the operations of the business are tightly linked to the management team.
In short, this is where you sell to staff via a trust. The most common option is for the company to make tax-deductible payments into the ESOP, and then the trust gradually purchases owner shares. Keep in mind that ESOP valuations tend to be on the low end of the range because it is staff making the purchase.
This tends to be the most talked about exit and it became glamorous in the 1980’s. Because it is commonly known, most business owners dream of an IPO. It is however very rare, and very complicated. It does come with substantial benefits. It portrays prestige, offers access to long-term capital and raises awareness. Keep in mind that most companies are not viable candidates for this option and those who are, need to understand what being “public” means. In short, everyone will see your dirty laundry, if/when you get into short-term issues. If you have over $50 million in EBITDA and a lot of growth potential, then talk to an investment banker about this.
Becoming a passive owner has similar attributes to that of a silent partnership. It allows you to remain in control, whilst passing on leadership and making the company less dependent on you. This is a great option if you have enthusiastic senior leaders within your organization that are looking for an opportunity to step up. It also reduces key person risk, and can, therefore, set a great foundation for an eventual exit. You’ll be able to control the company’s strategy but step back from the day to day operations. Although you control the ownership, you can give equity or a bonus to staff that step into the executive positions. On the surface, this option seems easy. However, make sure the business has the critical mass to afford the additional overhead of the new management.
We have written a blog on this specific exit option. This strategy ties into several of the options above. With a recapitalization, the current owners finance part of the exit via the business. A recap can work well if you are an active and engaged owner, and willing to continue as such. This can be done in multiple ways, but a common way is selling part of the company to a new investor, often a PE firm, or having the company borrow money to buy out some of your holdings.
Sometimes a business is not sellable. This is fine and shouldn’t be something not to consider. Unwinding a company and liquidating its assets might yield the most profitable outcome. Especially for firms with a lot of physical fixed assets, for example, inventory, equipment, or real estate. This type of exit is common in declining or heavily consolidating industries. One obvious downside is the impact on your employees in the short-run.