June 22 is a special day in Cleveland, Ohio, for it marks the true end of a 52-year championship drought for the city. As I sit and watch the historic downtown parade for our Cleveland Cavaliers, I am compelled to realize, along with my fellow Clevelanders, the true value that this team represents for our city. Their mission required each player to work long days and nights under intense pressure to succeed, and in the end, extract the value for their efforts in the form of a championship.
This scenario is not unlike those faced by business owners. Owners put all of their time, passion and sweat into their business to create and grow the company that they have envisioned. The hope is that eventually, a company reaches a point where its owner has the same opportunity to realize the value that he/she knows has been created through years of effort.
Here are some of the more common paths business owners can take to extract value:
- Succession to a younger generation:
The option to keep the business in the family is appealing to many owners; however, it is often difficult to complete. It is the shift of their ownership and operational control to their heirs. The time it takes to shift control can vary significantly. It often depends on their own readiness, the readiness of their company, and the readiness of their successors. This could be the business owner’s first choice of exit options, but it might not be the best option for the company to succeed.
- Management buyout:
This can take place in many different ways. Two common forms are through an Employee Stock Ownership Plan (ESOP) or a management team buyout. ESOPs are company-funded stock purchase programs that reward employees by allowing them to purchase ownership shares from a trust set up on behalf of the company. A management team buyout presents the opportunity to key management to purchase the company. Both options give the business owner the opportunity to show their gratitude for all the hard work the management team has put into the company while providing the business owner with the value to move on to the next steps in their life.
- Sale to a third party:
This option places the business owner in front of strategic and financial buyers, giving the owner the power to negotiate terms of sale with the help of their advisors. These strategic buyers include other privately owned companies in the same or complimentary industries. Financial buyers are typically private equity groups; but they could be individuals as well. The sale could include majority or minority ownership purchases. A sale to a third party is often the option that results in the highest value, as investment bankers can create competition through an auction process.
Whichever option is chosen, it is always best to consult with a Certified Exit Planning Advisor (CEPA) before you begin the process (generally two years in advance). Using an advisor will ensure that all available options can be presented to the business owner, and that they are prepared to maximize the value of the business. As the owner decides which path is right for them, ask the question, “What does your championship look like?”