10 Types of Business Exit Plans

1. Strategic (Industry) Buyer

Strategic buyers are companies interested in buying your business that already operates in your industry. By buying your company, they have hopes to grow their footprint and take market share more quickly. They tend to be larger, well-capitalized firms that aren’t as concerned with generating cash flow right away. A great example of a strategic buy is T-Mobile’s acquisition of rival Sprint in 2020. This is a really large-scale example, but it happens every day with medium to small-sized businesses too.

Because strategic buyers aren’t as laser-focused on just the returns aspect of the deal and are looking for market share and strategic synergies, they often pay the highest price–meaning more money for you.

Pros

• Potential for a higher valuation
• Typically quicker exit thanks to buyer knowledge of the industry, business model, and financing
• Better opportunities and compensation potential for your employees since they will be acquired into a company that is similar to yours

Cons

• The tendency for acquiring company to restructure your company (including hiring/firing employees and adjusting benefits)
• Possible clashes between your corporate culture and that of the company you sell to

2. Financial Buyer (via a Leveraged Buyout- LBO)

Financial buyers, as the name implies, want to acquire your company as a long-term investment opportunity. They generally perform a leveraged buyout (LBO), meaning they borrow a substantial amount of money to buy your company.

They tend not to pay as high a price as strategic buyers because they care more about returns and cash flows than general long-term business goals. Not to mention they have to pay down their loan.

LBOs from financial buyers are great for large companies that otherwise would be unaffordable for most buyers as it enables them to borrow the funds needed to buy your business.

Pros

• Typically operate business as usual, with minimal operational disruptions at the ground level
• High potential to stay involved in the business after the sale (if this is what you want)

Cons

• May not get the best price (financial buyer’s goal is to buy businesses for as little as possible, with the hope of selling them at a profit five or ten years down the road)
• May be required to stay in the business longer than you want (Typically 2+ years minimum with an earnout)
• Longer due diligence because of potential lack of industry-specific experience
• High leverage may necessitate undesirable cost-cutting and margin optimization

3. Management Buyout (MBO)

A management buyout (MBO) is exactly what it sounds like. Your management team buys out your stake in the company. MBOs are great if you’re retiring, have a great team in place, and care about the company’s future beyond your time there.

While MBOs are easy to arrange because you don’t need to hunt for buyers, getting funding or raising capital for the purchase can be tough if your business finances have not been consistently profitable and showing growth over at least the past 12 months.

Pros

• It’s easy to arrange. You already have buyers in place who know the company and are eager to take ownership
• You’ll have more confidentiality as you aren’t sharing your financials with prospective buyers outside of the company
• The higher chance that the business you’ve successfully built continues in a way that is meaningful to you

Cons

• It may be harder for buyers to raise funds leaving you to consider a lower purchase price or a deal that doesn’t involve all-cash upfront
• Risk of insider trading by management as they would have access to material information about the company’s stock before it’s made public
• Potential lack of business ownership experience

4. Employee Stock Ownership Program (ESOP)

This regulated alternative to a Management Buyout allows the business owner to sell all or part of the company to a trust, which generally borrows money in order to effect the transaction. Creating the trust is effectively creating a buyer where the trustee and plan administrator handle oversight of the company. While there are plenty of regulations, this can be used as an exit plan.

Pros

• Alleviates the need for a buyer
• Offers potential tax benefits (such as capital gains deferral)
• Maintains company legacy
• Aligns employee and shareholder interests

Cons

• Must follow regulations to get tax benefits and avoid negative consequences
• Requires several types of professionals such as a lawyer, business appraiser, investment banker, and financial advisor
• Retiring owners need a knowledgeable management team to keep the company alive

5. Leveraged Recapitalization

In a leveraged recapitalization or “leveraged recap,” a company borrows money and buys back shares from the owner (akin to a share buyback program offered by public companies from time to time).

In doing so, the company shifts its capital structure away from equity and more towards debt. Leveraged recaps are good for business owners who want a quicker way out.

Pros

• A fast, minimally disruptive exit strategy
• Confidential—between the company, its owners, and the lender

Cons

• Adding all this extra debt can be financially risky to the company
• The business may need to provide additional financial reporting to debt holders
• The lender may require personal guarantees

6. Sale to a Foreign Investor

Foreign groups can sometimes seek to acquire minority or majority shares in U.S. firms. Typically, the investors are firms linked to the U.S. company’s industry or supply chain. However, you may have to jump through more regulatory hoops and deal with potential culture and time zone differences.

Pros

• Drastically expands market of buyers
• Increased likelihood of a great price due to large market

Cons

• Extra regulatory hoops to jump through
• Potential geographic, cultural, and time zone complications can slow the process down

7. Private Initial Public Offering (Private IPO) or Private Placement of Equity

You can use investment firms to facilitate a “private IPO,” which is essentially selling your business’s stock to a private group of accredited investors. You’re still selling securities, but because it’s a private transaction, there are much fewer regulatory hurdles from the SEC and other organizations.

Pros

• Faster and simpler than traditional public IPOs
• Can be lucrative

Cons

• Less lucrative than traditional IPOs
• Must work with a private equity firm, who may make significant changes to your business in an effort to increase return on their investment when they sell their stake in the future
• Complex and expensive due to legal and other professional service fees

9. Estate Planning Transition Plans

Maybe you want your business to remain in the family, or you have a trusted partner you’d like to take the reins. With prior planning, owners can take advantage of a number of trust and estate alternatives for the gradual transfer of the firm to new shareholders (usually family members).

Pros

• More choice in new owners
• Helps you ensure the business survives if you care about its success after exiting
• Makes it easier to get involved later if desired

Cons

• Often no sale proceeds – if a trust or other entity owns shares that have been gifted
• Family members (or other heirs) may not be business-savvy
• Can lead to family conflicts

10. Taking the Company Public (IPO)

You can make your business a publicly-traded company by doing an Initial Public Offering (IPO). Offering company stock in public markets creates immediate liquidity for shares sold.

The IPO process isn’t for everyone. To put things into perspective, there are only about 6,000 of the country’s largest companies on the NYSE and Nasdaq—a fraction of the tens of millions of businesses in the US. But there are dozens of less popular exchanges for smaller companies within the United States. It’s not a simple process to get listed on any of these, but can be rewarding. Just be prepared to endure more scrutiny from shareholders, analysts, and the SEC, to name a few.

Pros

• One of the most lucrative strategies
• Immediate liquidity for selling shares, though there may be some restrictions on the timing of selling your shares
• Offers publicity if you seek it

Cons

• Complicated and costly due diligence
• Extra scrutiny from investors and regulatory bodies
• Stock may fall flat if investors don’t see potential