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CEPA Term Session 4-Questions and Answers
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CEPA Term Session 4-Questions and Answers
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CEPA Term Session 4-Questions and AnswersWhat are the cons of selling to employees (ESOP) as an exit option? Correct Ans-i)
Complicated and expensive
ii) Requires securities registration exemption
iii) Company compelled to buy-back shares from departing employees
iv) Generally suitable only for gradual exit over time
What are the pros of selling to a financial third party as an exit option? Correct Ans-•Really
smart, growth-oriented and supportive partners •Two bites at the apple for the seller?
•"Platform" synergies if other companies are part of the buyer's portfolio •Growth capital
(possibly to fund acquisitions as well) •Allows partial exit and participation in future value
gains •Reduces seller's overall financial risk by diversifying assets •Works well with other exit
options, such as a management buyout or ESOP funding
What are the cons of selling to a financial third party as an exit option? Correct Ans-
•Tough due diligence
•Distraction / Loss of focus
•Privacy concerns
•Emotional for owner / loss of control
•Culture shift
•Asymmetrical negotiations
•Slow-ish transaction with expensive professional fees
•Not a clean break / may be after sale tie-downs or shifting of performance risks to realize the
agreed-upon price (ie. earnout)
, CEPA Term Session 4-Questions and Answers
•Third-party governance can be disorienting for owners and management teams
How does Intergenerational Transfer actually work? What are the transition optins?
Correct Ans-•Sale or a gift, or a combination. Estate and tax planning may play a significant
role
•Exiting family member(s) often finance the transaction themselves
•Equity may be transferred over time in smaller pieces
•Earned equity requirements are sometimes attractive •Diversified classes of stock can be
considered (most flexible in LLC and C-corporations)
•Family equity and employee ownership/incentives are not mutually exclusive
What are the pros of selling to a strategic third party as an exit option? Correct Ans-
•Higher price (highest of the options in most cases)
•Stronger platform for growth (capital, capacity), which could activate greater legacy and
liquidity opportunities
•Negotiating leverage/competitive bidding
•Patient buyer/longer-hold compared to private equity groups •The equity IRR expectations
may be lower, which will drive a higher price
•Depending on how strategic it is for the buyer, transition terms may be better
•Business refresh (growth, new energy), which can drive recruiting and retention of great
talent
•Breaks deadlocks, if they exist, with partners, family, or management
•Two bites at the apple in the case of a first partial sale?
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