Who Will Own Your Business After You?
Exit Options, Part One: Internal Transitions
“Begin with the end in mind.” It is a well-known quote by Dr. Stephen R. Covey. Why is it so popular? Because it is the stinking truth.
Most business owners know they will eventually leave their company. Whether they want to admit it or not is, well, another discussion.
Far fewer have clearly evaluated how ownership will transfer, how the transaction will be funded and whether the outcome will support their life after the business.
Exit options generally fall into two categories: internal and external. Another commonly missed point is that an exit does not have to be all or nothing. It can combine several options and happen at different times.
For now, let’s break down the internal and external options.
This first edition covers internal transitions, where ownership stays with someone already connected to the company. The primary options are family, management, existing partners and employees.
1. Transfer to Family
Ownership is sold, gifted or transferred gradually to the next generation.
Potential advantages
- Preserves family ownership and legacy
- Gives the owner more control over timing and structure
- May create less disruption for employees and customers.
Potential disadvantages
- The next generation may not want or be ready to lead
- Family members may lack the money to purchase the business, requiring a lower price or seller financing
- Family dynamics can create conflict inside and outside the business
2. Management Buyout
The management team purchases some or all of the company.
Potential advantages
- Preserves leadership and institutional knowledge
- Provides continuity for employees and customers
- Can reward key leaders and be combined with outside capital
Potential disadvantages
- Limited buyer capital may require heavy seller financing and less cash at closing.
- Strong managers do not always make strong owners
- The seller may remain dependent on the company’s future performance
3. Sale to an Existing Partner
A current partner purchases the departing owner’s interest.
Potential advantages
- The buyer already understands the business
- The transition may be less disruptive
- A strong buy-sell agreement can create a more controlled and lower-cost process.
Potential disadvantages
- The sale price may be lower, and proceeds may be received over time.
- The partner may not have sufficient capital.
- An outdated agreement or partner disagreement may restrict the owner’s options
4. Sale to Employees
Employees acquire ownership, most commonly through an ESOP.
Potential advantages
- Preserves the company’s independence and rewards employees
- May provide significant tax benefits
- Can support a gradual transition
Potential disadvantages
- ESOPs are highly regulated and can be expensive to establish and administer
- Financing and future share-repurchase obligations can pressure company cash flow
- The strategy is not appropriate for every company
The Exit Option Is Only One Part of the Plan
There are three connected areas of readiness:
- Building and protecting business value
- Personal financial readiness
- Planning for life after the business
An internal transition may preserve legacy and continuity, but it still must provide enough liquidity, reduce the owner’s risk and support the family’s future.
Whether the eventual exit is internal or external, owners should know:
- What is the business worth, and how much cash is needed at closing?
- How much financial risk can remain, and how will the business income be replaced?
- What does the owner want life to look like afterward?
The most familiar buyer is not automatically the best option.
The right transition is the one that works for the business, the buyer and the owner’s broader life plan.
Next edition: the primary external exit options.
We've created a complimentary Business Succession Planning Guide that expands on the concepts discussed in this article and explores both internal and external transition strategies in greater detail.
If you'd like a copy, simply complete our Contact Form and note "Business Succession Guide" in the message. A member of our team will send it to you and be happy to answer any questions you may have.
Van Hulzen Financial Advisors is an investment advisory firm registered with the Securities and Exchange Commission ("SEC"). SEC registration does not imply a certain level of skill and or expertise. The material presented is for informational and educational purposes only. It is not meant to be considered investment advice or a solicitation to purchase or sell any securities. Van Hulzen is not a tax advisor. Any professionals highlighted in the material presented are not affiliates of Van Hulzen. The opinions, thoughts, views, or commentary expressed do not represent the official views of Van Hulzen or its employees. The information provided by any of the outside professionals highlighted has not been verified for accuracy.