December 2020 MiMfg Magazine 13
Exit Paths for Business Owners
By Matthew D . Sumnicht , CPFA • Bowline Financial , LLC
As we head into another month of this pandemic with yet another set of revised guidelines for a safe return to work , most owners are currently waistdeep focusing on how they can preserve and protect the value of their business while some have their eye on the endgame : being able to someday sell your business for an amount of money that will enable you to live the rest of your life as you see fit .
Demographically , we know that the future holds many more sellers than buyers . What we don ’ t know is how this crisis has impacted that imbalance between the number of sellers and the number of buyers . We suspect that final 2020 numbers will show greatly reduced Mergers & Acquisition ( M & A ) activity . We also suspect that many owners are not having a whole lot of fun getting lean and mean . If those two assumptions are true , when this market turns around , there will be a host of owners scrambling for their exits .
When the Time Comes , Will You Be Prepared ?
When business owners start to think about exiting their companies , the number of possible Exit Paths can seem limitless . In reality , there are only eight :
1 . Transfer the company to family member ( s ). 2 . Sell the business to one or more key employees .
3 . Sell to employees using an employee stock ownership plan ( ESOP ).
4 . Sell to one or more co-owners . 5 . Sell to an outside third party . 6 . Engage in an initial public offering ( IPO ). 7 . Retain ownership but become a passive owner . 8 . Liquidate .
According to the Business Enterprise Institute 2016 Business Owners Survey Report , the Exit Paths most owners intend to use are :
• 59 % of owners anticipate a third-party sale
• 30 % anticipate a transfer to the next generation
• 31 % anticipate a management buyout
• 6 % expect to sell to an ESOP
How to Choose an Exit Path
We have found these steps to be the most prudent when starting the process :
Step 1 : Start thinking about your exit before you are ready to exit . Owners who give themselves time to plan give themselves the greatest number of Exit Path options .
Step 2 : Owners should determine their objectives . Objectives may include when they want to leave , desired successor and how much money they will need .
Step 3 : Review the resources available to reach each objective . Resources include business value , non-business income and business cash flow .
Step 4 : Owners should retain a professional to determine a company ’ s fair market value in order to place all owners on the same objective page . Valuation results often eliminate potential Exit Paths . For example , if the value of a company is high but the owner is not willing to devote the time necessary to orchestrate a transfer to employees , a sale to a deep-pocketed third party is a better option for that owner .
Step 5 : Owners must perform cash flow projections to determine whether there is sufficient cash available to even consider an insider purchase .
Step 6 : Owners must evaluate the tax consequences of each Exit Path . Keep in mind that while this analysis takes place , owners must continue to increase the value of their companies . Additionally , they will likely need to revise their existing buy-sell agreements to reflect the true value of their companies . 6
Matthew D . Sumnicht , CPFA , is a Managing Partner and financial advisor at Bowline Financial , LLC . He can be reached at msumnicht @ bowlinefinancial . com .