Educating owners on exit strategies.

• Author: Oleksak, Michael
• Position: Private companies

Over the next several decades, millions of United States businesses will be sold, merged, recapitalized, gifted, closed or liquidated. With any of these events, both the owner and the company will benefit from advance exit planning. Financial executives play a key role in educating company owners on the basics of exit planning.

Indeed, part of the fiduciary duty of a chief financial officer or vice president of finance of a privately held business is to protect the company from the risk of an unplanned change of ownership--through sudden death--of both the shares and the operation of the business. These officers also play an important role in increasing the company's value by strengthening it for the possibility of a future transition or transaction.

Business owners should be aware of the following three "must haves:" A will, a succession plan and an exit strategy.

The will protects the company ownership in case a tragedy or sudden death affects the owner. With a will, the shares will stay out of probate court and land in the hands of the person or people chosen by the owner, thereby ensuring some sense of business continuity.

The succession plan will help with the orderly transition of the operations of the business if the owner is suddenly incapacitated. The exercise of preparing a succession plan will also help establish whether internal management is strong enough to handle running the company without the owner.

The exit strategy will be the catalyst to determine whether the company is ready for some other entity to assume ownership. Are the books and records, processes and systems, management and employees, business model, brand, public image and reputation desirable enough for someone else to pay to acquire it? If the answer is yes, then ask: Would the acquirer be external or internal?

Exit Options

The owner's external exit options are sale to a strategic buyer or to a private equity group. Internal transfer options include a management buyout, sale of shares through the Employee Stock Option Plan (ESOP) or gifting of shares, usually to the next generation of the owner's family. Each of these options has a different valuation range, with external transfers generally having higher values.

The owner will also relinquish control of the firm after the external transaction, giving up the ability to subsidize his or her lifestyle through internal expenses. The external exit option also eliminates the owner's control over his or her legacy...