Most business owners believe that an external sale of their business is their only (or at least best) Exit Alternative. Typically this is because business owners know that their employees and/or fellow family members dont have the type of money required to secure a successful exit plan for them. So often times, business owners approach (view or see) the topic of Exiting a business as meaning that they need to sell their business to an outside buyer with enough money to pay them what they want.

So while an external sale is intuitively appealing, its my experience that an understanding of internal transfers will help open up a very good dialogue with a business owner so that they can understand all their options and make a well informed decision. In fact, analysis of an internal transfer of the business can be a powerful alternative to a business owner looking for an Exit Strategy. And, depending upon the business owners motives, it may be the best alternative available.

Internal transfers of ownership in a business are often times overlooked because they are not intuitively understood by the business owner and/or the business owners advisors. So lets examine some of the internal transfer methods that are available to a business owner to illustrate the benefit of a well-conceived Exit Strategy.

Internal transfer methods include Employee Stock Ownership Plans (ESOP) Transfers, Management Buyouts (Sales to Family and Management), Gifting Strategies, Private Annuities, Family Limited Partnerships, and Charitable Transfer Strategies. The three (3) primary differences between these internal transfer alternatives versus (and the) external transfer alternatives are:

(i) the corporate assets, including future cash flows, are leveraged to achieve these strategies,
(ii) the driving force behind these engineered strategies is a business owners motive of passing the business to someone other than an outside buyer, and
(iii) the business owners will frequently be considering tax planning and estate planning along with their Exit Strategies. Internal transfers, as a general rule, allow for more flexibility in these areas than external transfers.

A business owner considering an internal transfer can set the price and terms for the transfer and say to their family and/or management team, Here is what I want/need for my business. For this reason, internal transfers are often referred to as controlled transactions because the business owner is working with assets that they already possess in structuring their Exit from the business. So if those assets are sufficient to achieve that business owners goals (based on their motives), then it is worthwhile to examine an internal transfer.

This is in sharp contrast to a business owner attempting an external transfer because they are often subject to a process that includes outsiders investigating their potential investment in the Target Company and then telling the business owners, Here is what we are willing to give you for your business. So, the Exiting business owner can expect to lose quite a bit of control over the process. And, because many business owners possess a unique psychological mix of independence, intelligence and control orientation, losing control to an outside buyer often leads to choppiness in a deal.

Mergers and Acquisitions professionals will often advise business owners that if the business owner wants to set the price for the deal, then the outside buyer will be setting the terms for the deal. A deal is struck when each party is equally happy. Or, as one dealmaker said, every successful external deal is a little miracle.

So, one will naturally ask, Whats the downside of an internal transfer versus an external transfer? Quite simply, negotiating with family members and key employees can be inherently dangerous. These individuals (and their advisors) will require detailed and confidential information from the business owner in order to fully understand all the risks inherent in owning the business really no different than the external buyer. And of course, most business owners are not anxious to share all their information with their employees; it goes against the nature of the relationship amongst workers and owners.

So then, how does one go about negotiating an internal transfer? The answer is very carefully. And, the most cautious first step that a business owner can take is to engage an intermediary which can be any one of the existing advisors to that business to assist with the transaction. Having trusted advisors involved in the process raises the level of objectivity and lowers the level of emotions when negotiating the transfer.

Because, after all, if the internal transfer does not work out, it will not add a lot of Value to the business to have [further] frustrated employees due to that business owners own doing. Its easier to place blame for a failed transaction with a third party advisor so that all parties involved can amicably return to the business of running [and not transferring] the business.