Exit strategies Featured

7:00pm EDT February 28, 2007

Have you thought about the end? The meaning of life after the business is sold? Who should get the company, and when will you be ready to pass the hat to a family member or sell what is, for many entrepreneurs, “the third child”? Planning how you will exit your business is just as important as strategizing how to launch a company and grow it.

“Everyone must exit their business at some point,” says Joel Guth, an advisor with Citigroup Global Markets Inc.’s Citigroup Family Office in Columbus. “You either sell it, pass it on to family, or you pass on. Planning allows you to pick the best option. The sooner the better.”

Smart Business spoke to Guth about succession options and executing the planning process.

When is the right time to start considering a succession plan?

Actually, when you start the business, you should already be thinking about how you are going to exit. Certainly, if you are three to seven years away from retirement or at least want to reduce your involvement or risk in the business, it is time to have a serious conversation with your advisors about how you will exit, what your options are and what you want to accomplish. The sooner you plan, the greater the potential you have to enhance the after-tax value of the sale proceeds or reduce your tax liability.

What are the first conversations concerning succession that you have with business owners?

The first questions I ask are, “What are your business goals? Do you want to enhance the value of your company and sell, do you want to pass it on to your children, or do you want to sell it to key employees?” When you plan, you get to decide who will be your partner in your exit strategy.

Next, we discuss personal goals. Are you at the point where you are truly ready to quit working? What role do you want to play when you exit? Will you walk away or maintain a position in the business for a few years? Or do you want to retire from the business and start something new? If we understand the vision of the owner, we can help him or her design options that are in line with this vision.

Is the risk of owning one’s own business a concern?

Business owners have an extremely concentrated investment. The business may be worth $50 million and they might be worth a total of $55 million — so more than 90 percent of their wealth is tied up in one investment.

In your middle to late 50s, you may be concerned about that risk. If the owner wants to diversify some of the concentration risk, there are options. One option is to consider bringing in a private equity firm and selling a piece of the business. This may allow an owner to take a considerable amount of money out of the business, but continue to run the business and still maintain an ownership position.

What are the advantages and disadvantages of selling the business to a private equity firm?

Private equity firms are more aggressive now than they’ve ever been in acquiring middle-market companies. Institutional investors are placing record dollars with private equity funds, therefore expanding those funds’ ability to target middle-market companies. They work with the owners and management to leverage the resources of the private equity group to grow the company and make it more profitable. They then sell the business within a short period of time — three to seven years, usually.

The advantage for business owners who want to continue to work and reduce their risk is they can sell 60 percent to 80 percent of the company and still have ownership. This percent ownership may be a significant piece of the value when the equity firm sells the business.

After determining personal and business goals, what next?

The third piece is timetable. The timetable is a function of your personal goals, business goals and the economy. You don’t want to exit during a lull in the economy because you will take a reduced value for your business.

Also, some industries are more cyclical than others. You must consider factors like interest rates and the M&A market. Ideally, you want to design the exit that fits your goals and be able to pick the timing of your sale.

Citigroup Family Office is a business of Citigroup Inc., that provides clients with access to a broad array of bank and nonbank products and services through various subsidiaries of Citigroup, Inc.

Citigroup Family Office is not registered as a broker-dealer nor as an investment advisor. Brokerage services and/or investment advice are available to Citigroup Family Office clients through Citigroup Global Markets Inc., member SIPC. Guth is a registered representative of Smith Barney, a division of Citigroup Global Markets Inc., and he has qualified to service Citigroup Family Office clients.

JOEL GUTH is an advisor with Citigroup Global Markets Inc.’s Citigroup Family Office, in Columbus. Reach him at (866) 464-2750.