A lot of articles are written about how to start a business, but I don’t see a lot of columns on how to exit a business when the time is right for you. Having just gone through this recently, here are the options that I evaluated before selling our family business.

• ESOP. An employee stock ownership plan, is a way to transfer ownership of your company to your employees. The company buys back your stock and puts it into a trust where the stock is distributed to employees as part of their annual compensation. Employees don’t pay anything for the stock but can’t sell it until they are fully vested and when they retire or leave the company. The benefit to employees is they can build significant net worth if they stay with the company and help it grow. The benefit to the selling shareholders is they don’t pay any federal or state tax on the sale if they reinvest the proceeds into “qualified investments” within 12 months of the sale. Qualified investments are generally U.S. stocks and bonds. This is a win-win option in that employees end up owning the company they helped grow and shareholders can defer taxes until they sell the qualified investments. The downside is legal, accounting and trustee fees can be $50,000 to $100,000 a year or more, so this isn’t for small businesses.
• Sale. The first option that comes to mind for most business owners is to sell the business to a third party. This is easier said than done. Most businesses only support the owner’s lifestyle and don’t generate enough profits for an investor to buy the business. The other problem with selling most small- and medium-sized businesses is the CEO is, in most cases, the franchise. He or she knows all key customers, knows the inner workings of the business, and most small businesses haven’t built a management team that can run the business when the owner leaves. Because of that, most investors won’t pay much for a business like this, if they will even buy it at all.
• Recapitalization. A recapitalization is when a bank or private equity fund will recapitalize the company and let the owner take out a significant amount of money. The problem with this approach is that while a bank (if the business is very profitable) will allow the owner to take out a significant amount of money and still retain control, a private equity fund will almost always require majority control. Once the owner gives up majority control, they have to take orders from someone who doesn’t know the business as well as the owner. This can cause a lot of frustration for both parties and generally results in the owner leaving the business. I have seen this happen many times, and often the business ends up folding shortly after the owner leaves.
• Employee-owned cooperative. This is a model I have only seen a few times. In this case, the employees pool their funds, coupled with a bank loan, and buy the business from the owners and run it as a cooperative. There are less government restrictions on a cooperative than on an ESOP and the ongoing legal and accounting costs are a lot less than with an ESOP. The problem with this approach is corporate governance ends up a lot like a homeowner’s association meeting in that a lot of new owners who don’t have a lot of business experience want input.

In the book the “Seven Habits of Highly Effective People” by Stephen Covey, one of my favorite habits is to begin with the end in mind. When you start a business, don’t wait too long to start thinking about an exit strategy and begin working toward it. The sooner you do this, the more successful your exit will be.

Jim Sobeck is a Greenville-based serial entrepreneur. He most recently was CEO of New South Construction Supply, a distributor of building products he grew from four locations to 11 locations before selling it in February 2023. He is also the author of “The Real Business 101: Lessons From the Trenches,” available on Amazon. He can be reached at jrsobeck@gmail.com.