CEPA Terms - Session 4: Questions & Solutions (Pass!)
Why should CEPAs Care about all the exit options? Right Ans -
•Empowering owners with choices •Differentiates the advisor - qualified &
well-trained •Avoids the appearance or perception of bias toward one or just
a few options •Helps with "issue spotting" •Organizes how the inter-
disciplinary advisory team is structured •A broad spectrum of options
decreases the transition failure rate
What are the two general categories for private ownership exit options?
Right Ans - Inside vs Outside
What are the 4 options for "inside" Private Ownership Transition? Right
Ans - •Intergenerational Transfer
•Management Buyout
•Sell to Existing Partners
•Sell to Employees
What are the 4 options for "outside" Private Ownership Transition? Right
Ans - •Sell to a Strategic Third Party
•Sell to a Financial Third Party
•Recapitalization
•Orderly Liquidation
Value Acceleration must deliver at least two of the three crucial benefits
(CLL): Right Ans - Clarity, Liquidity, Legacy
Transfer of business stock to direct heirs, usually children. 50% of business
owners want to exercise this option - in reality, only about _______% actually
do. Right Ans - Transfer of business stock to direct heirs, usually children.
50% of business owners want to exercise this option - in reality, only about
30% actually do.
What are the pros of Intergenerational Transfer as an exit option? Right
Ans - i) Business legacy preservation
ii) Planned
iii) Lower cost
iv) More control
v) Less disruption
, vi) High buyer/seller motivation
What are the cons of Intergenerational Transfer as an exit option? Right
Ans - • Family dynamics
• Illiquid buyers / lack funds
• Lower sale price, inability of successor generation to pay a premium
• Key employee flight risk
• Tradition may outstrip good strategy
• Failure to adequately train the successor generation - impacts on business
and personal well-being
• Customer and vendor acceptance
• Waiting too long to plan - underestimating complexity of this type of
transition
What are the pros of selling to employees (ESOP) as an exit option? Right
Ans - i) Business stays in the 'extended family'
ii) Shares purchased with pre-tax dollars by the ESOP
iii) Taxable gain on the shares sold to the ESOP by the owner may sometimes
be deferred
iv) ESOP is an employee benefit
v) May cause employees to think and act like owners
What are the cons of selling to employees (ESOP) as an exit option? Right
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?
Right 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?
Right Ans - •Tough due diligence
•Distraction / Loss of focus
Why should CEPAs Care about all the exit options? Right Ans -
•Empowering owners with choices •Differentiates the advisor - qualified &
well-trained •Avoids the appearance or perception of bias toward one or just
a few options •Helps with "issue spotting" •Organizes how the inter-
disciplinary advisory team is structured •A broad spectrum of options
decreases the transition failure rate
What are the two general categories for private ownership exit options?
Right Ans - Inside vs Outside
What are the 4 options for "inside" Private Ownership Transition? Right
Ans - •Intergenerational Transfer
•Management Buyout
•Sell to Existing Partners
•Sell to Employees
What are the 4 options for "outside" Private Ownership Transition? Right
Ans - •Sell to a Strategic Third Party
•Sell to a Financial Third Party
•Recapitalization
•Orderly Liquidation
Value Acceleration must deliver at least two of the three crucial benefits
(CLL): Right Ans - Clarity, Liquidity, Legacy
Transfer of business stock to direct heirs, usually children. 50% of business
owners want to exercise this option - in reality, only about _______% actually
do. Right Ans - Transfer of business stock to direct heirs, usually children.
50% of business owners want to exercise this option - in reality, only about
30% actually do.
What are the pros of Intergenerational Transfer as an exit option? Right
Ans - i) Business legacy preservation
ii) Planned
iii) Lower cost
iv) More control
v) Less disruption
, vi) High buyer/seller motivation
What are the cons of Intergenerational Transfer as an exit option? Right
Ans - • Family dynamics
• Illiquid buyers / lack funds
• Lower sale price, inability of successor generation to pay a premium
• Key employee flight risk
• Tradition may outstrip good strategy
• Failure to adequately train the successor generation - impacts on business
and personal well-being
• Customer and vendor acceptance
• Waiting too long to plan - underestimating complexity of this type of
transition
What are the pros of selling to employees (ESOP) as an exit option? Right
Ans - i) Business stays in the 'extended family'
ii) Shares purchased with pre-tax dollars by the ESOP
iii) Taxable gain on the shares sold to the ESOP by the owner may sometimes
be deferred
iv) ESOP is an employee benefit
v) May cause employees to think and act like owners
What are the cons of selling to employees (ESOP) as an exit option? Right
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?
Right 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?
Right Ans - •Tough due diligence
•Distraction / Loss of focus
