Module 5: How does the transition process work?

There are many options available to transition out of your business. In this lesson, we will focus on methods that are less frequently used for small- to medium-sized companies. Nonetheless, we want you to know about them because one of these options might be applicable to you.

Key Points

  • If you have a partner, selling to your partner is attractive because of the trust you have with each other. Also, this option requires less negotiation and lower transition costs. A buy-sell agreement can overcome the most common risks: lower sale price, lack of funding, and a lengthy payout horizon.
  • An orderly liquidation is usually chosen when the business is failing and has few options. This exit option is easy to start and can be carried out in pieces but yields very little proceeds. Employees are left in a lurch as it tends to leave a soiled reputation in the community.
  • Recapitalization involves an influx of cash from a bank or equity investor so you can take some money out of the business. However, these investors typically want you to continue leading the company. This option isn't a total exit, it might be used as a step in your longer-term transition.
  • Employee Stock Ownership is typically granted through a qualified plan, an Employee Stock Ownership Plan (ESOP). An ESOP is a retirement plan, somewhat comparable to a 401K plan. Employees get shares of the company which typically motivates them to perform better and yields better business results. This plan requires cash to fund the grants of stock; the cash is provided by you or a bank.
  • An Initial Public Offering is the option chosen when a business has significant growth potential and needs a lot of money to fund that. Individual investors are attracted to buy stocks due to the growth potential and the quality of the management team.

Download the workbook for Module 5

What transition options are there?

Watch this video for a brief explanation of the less-common transition types along with their pros and cons.

Key Takeaways

  • Selling to an available partner works best when a buy-sell agreement is in place. This pre-plan explains how the business will be valued and funded by the buying partner. It also spells out the terms of the payout.
  • Orderly liquidations sound orderly, but they aren't so nice for the employees or the community. And you won't get the kind of payout you might have dreamed of. But if you're out of other options, you can begin your transition immediately using this option.
  • Recapitalization invites outside investors to take a portion of your ownership in exchange for money. But unless they take a major stake, or gain control in some other way, they'll expect you to maintain responsibility, and possibly carry some liability.
  • Granting employees stock (yes, for free!) is a gift. They typically respond with a better performance which ultimately improves the performance of the business. You can finance such a transaction with the help of a bank. Owners often carry a note as well which the business pays off over time.
  • An IPO requires a compelling vision and a strong management team to influence hundreds of individual investors to purchase shares of your company. Considerable growth potential is needed.

Next Steps

  • If you haven't yet, please download the workbook for Module 5.
  • Great work! You've got the hang of some of the lingo related to exit-strategy options; you're primed for the rest of this module.
  • Move to the next lesson to learn the ins and outs of transferring your business to a family member.