Exit strategies: sale and gifting options for private business owners.

• Author: Cassiere, George G.
• Position: Finance - Brief Article

The decisions made by privately held business owners concerning what will happen to the enterprise as they scale back and consider exit alternatives will or could impact numerous groups. Ultimately, the shareholder(s) will have to decide which stakeholders are most important and the ramifications of each alternative under consideration to the various sets of stakeholders.

If the major goal of the exit strategy is to maximize economic gain, a sale of the business to a strategic purchaser could bring in the highest pretax amount. An ESOP, however, could result in the best after-tax amount. When approaching the sale of a business to strategic purchasers, there is normally the walking of a tightrope when considering who should be given confidential information. Unfortunately, many times, those entities that would be enticed to pay the highest price are also those with the potential of doing the most harm with the information.

Every type of transaction that a business owner contemplates is either a form of a gift or a sale. Gifts to family members, charities and other beneficiaries are made outright or through inheritance. Often times, the gifting strategy can be enhanced through a recapitalization into voting and non-voting shares. Trusts, partnerships and limited liability corporations also get used on a routine basis to complement the gifting strategy.

It should also be noted that private equity and subordinated debt groups are well funded at this time and actively seeking deals. There are cases where these groups working in concert with management can be very competitive. Going public as an exit strategy is not viable or practical for the vast majority of privately held concerns. Goelzer has found that an informal auction process is the best method of conducting the sale of a business.

ESOPs work especially well where there is strong management and good positioning within a decent industry. Section 1042 of the tax code allows for...