Publications & Media

Tying it All Together- Exit Planning for Private Companies

The Anatomy of a Deal Newsletter

Smart Summary

  • 100% of private company owners will exit their business someday- the question is whether it will be carefully planned or chaotic?
  • There are many exit planning options, including transition to family members, employees, or partners, sale to a third-party buyer, recapitalization, liquidation, and more.
  • The difference between success and failure is often the complete investment of the owner in planning for an orderly transition.

It seems obvious, but sometimes it’s easy for business owners to forget: every single business owner will exit his or her business someday. That’s true for 100% of private company owners. The key question is whether that exit will be carefully planned and orderly, or whether it will be unplanned and chaotic.

For those of us who live and breathe the world of business and succession planning for private companies and their owners on a daily basis, nothing is more challenging—nor more rewarding—than helping a business owner develop and implement a succession plan that achieves his or her personal, business, and financial goals.

I’ve found that succession planning is more art than science, combining elements of business, accounting, financial planning, law, sociology, family dynamics, psychology, communication, and so much more. And, while it probably goes without saying, no two businesses are the same; no two business owners are the same; and, consequently, no two business succession plans are the same. When I’m asked for our standard business succession plan (something that actually happens sometimes!), I just laugh.

Nonetheless, it’s helpful to remind business owners that there are multiple paths they can take, even though each of those paths offers a multitude of different variations. While many business owners have a single plan in mind—often involving a transition within the family—sometimes that’s the right plan for that business and family, but oftentimes it’s not. In fact, we often find that the best solution for a business owner is something they historically were vehemently opposed to. When we dig deeper, we often find that there’s a misunderstanding about what that possible solution actually entails; when the business owner is properly educated, he or she finds that the previously discarded solution is actually perfect for his or her situation. Being educated about your options is always a good thing, regardless of your current personal preferences.

And even for would-be buyers of private companies, understanding the succession planning thought process will help those buyers better position themselves to tailor a solution that might help a business owner achieve his or her succession goals. Seasoned buyers of private companies know that they need to think like private company business owners and usually surround themselves with advisors who are similarly experienced at dealing with private company owners.

While we’ve talked in much more detail about many of these options in prior installments of this series, I think it’s helpful to compile a listing of each of those exit planning options at a high level, including some of the key considerations involved with each:

  1. Transition to family members: For many business owners, this is the dream. They love their business and they love their family. Wouldn’t it be amazing if the two came together? And keeping the business “in the family” allows for not only the founder’s legacy to continue, but it also promises a path toward maintaining the culture and feel of the organization that the founder built. However, a transition within the family is often the toughest to pull off. Family members may not be willing or able to assume the founder’s role. The founder may have a difficult time letting go, even if it’s what the owner says he or she wants. Key team members may not be on board. And the economics may simply not work, particularly when you factor in the onerous requirements of estate and gift taxes. For all of these reasons (and more!), only about 10% of private companies successfully transition from the first to the second generation. If you’re pursuing this path, you really need to be educated and realistic about where family transitions are successful, and where they’re not.

    For more in-depth information on family succession planning, you can check out the three-part “crash course” I authored previously (Part I on the most common land mines, Part II on gifting strategy, and Part III on GRATs and IDITs).
  2. Transition to management/partners: We haven’t talked about this option much in this series, although many of the components of such a transaction mirror the conventional M+A transaction. The key difference is the realization that the best and most readily-available buyer for your business may be the management or partners who are already involved in the business and understand it intimately. The flip-side, however, is that these “insiders” may have a harder time accessing the financing that is needed to pay market value to the departing owner. As a result, many exiting business owners pursuing this path end up taking on significant amounts of seller-financing or other forms of delayed payments. While delayed payments can be attractive in some cases, the seller retains the risk of the business’ success while not having any involvement in the business. That may be too big a gamble for a retiring business owner who is looking to diversify his or her financial risk.
  3. Transition to employees — the ESOP: The Employee Stock Ownership Plan (ESOP) provides a means for exiting the business through which the employees (through the ESOP plan) become the “buyer.” Sometimes business owners think of the ESOP sale as an alternative to a conventional M+A deal. I think that’s a bad idea. ESOPs work well when the economics are right and there’s an ownership-minded employee culture and management succession in place to pull it off. They work terribly when any of these ingredients are missing. While ESOPs can offer several tax benefits, those benefits may not be available in certain cases or may be offset by a lower purchase price. Simply put, ESOPs are a great option for some businesses, but certainly not for every business.
  4. Sale to a third-party buyer: We’ve talked about this particular strategy frequently throughout this series, so I won’t belabor the point here. Sales to third parties provide the greatest (and fastest) path to liquidity and allow the business owner to (in most cases) substantially de-risk his or her nest egg. But third-party sales have their own issues, some of which may depend on whether you’re selling to a financial buyer or a strategic buyer. The buyer may require the seller to remain involved in the business, such as through a post-closing employment requirement or an equity rollover, preventing a complete exit. A portion of the purchase price may be subject to an earnout. The buyer may come back after the closing and seek to claw back purchase price through an indemnity claim. The buyer could have an ineffective transition plan or may upend the company’s culture or team. While third-party M+A deals are great for many business owners, not every business is suitable for a third-party sale. And some business owners fear what might happen to the business and the team after they cash out.
  5. Recapitalization: While there are several different forms, a recapitalization can provide a nifty solution that allows the business owner to “take some chips off the table,” while remaining invested in the company. The business owner gets to de-risk a significant portion of his or her investment in the company, but continues his or her investment in the company’s future. The recapitalization can be funded by taking on debt to finance a dividend to the owner or by bringing in a new equity partner, each of which brings its own benefits and risks. In most recapitalizations, the seller may retain an operational role in the business…which, of course, could be good or bad depending on the owner’s goals. Recapitalizations are often overlooked by many business owners, but are usually worth a look, if for no other reason than to offer an alternative to a conventional third-party sale.
  6. Liquidation: Most business owners don’t think about this one—and don’t want to think about this one. And for businesses having a large portion of their value in the form of “goodwill,” the liquidation won’t make much sense. But for businesses with meaningful physical assets, an orderly liquidation may actually present a cleaner exit. While rare, this option is occasionally worth considering under the right circumstances.

I’ve been a part of each one of these; I’ve seen them go well and I’ve seen them go badly (sometimes, VERY badly). The difference between success and failure? Very often, it’s the complete investment of the business owner in planning for a successful transition…identifying his or her goals, resolving conflicts that may exist among the various goals, developing a strategy that achieves those goals to the greatest extent, and committing the time and effort to implementing that strategy.

Does it take a lot of time? Yes. Will it be difficult? Yes. Is it worth it? YES!

The next step is up to you.


Believe it or not, this month’s article represents the 4-year anniversary of the very first Anatomy of a Deal. And, that seems like as good a time as any to bring this series to a close, at least for now.

While there are undoubtedly other topics we could cover here, the intention of this series was to provide a high-level overview of certain key issues that current and future private company business owners should consider when approaching a private company transition. Broadly speaking, I think we’ve accomplished that goal. I’ve always believed that when there’s nothing more to be said, it’s time to stop talking.

I’d like to thank the many experts who contributed to this series over the years and added their valuable perspectives to the conversation. I’d like to thank the fantastic marketing team at Kegler Brown that helped me keep this going and made these articles look and read perfectly. Finally, I’d like to thank those of you who took the time to read these articles and to share them. I’ve heard from many of you, and I’m humbled by your support.

When I started this project 4 years ago, I never thought I’d be doing this 4 years later. Despite the significant time and effort invested, I can honestly say that it was a lot of fun. Thanks for coming along with me for the ride.

Read last month's piece: The Dreaded Fraud Exception

Read the entire 4-year series

Receive updates and insights from Kegler Brown.