In our last piece, we looked at the management buyout, a way to sell the business while keeping the same people in the room. This time we are looking at the opposite end of the spectrum: selling all of it and walking away for good.

For many founders, selling a business is the culmination of years, sometimes decades, of work. You built the company, made the difficult decisions, hired the people, won the customers, weathered the setbacks, and watched it become something larger than you first imagined.

Selling 100% of the business is different from any transaction in which you keep a piece. Once it closes, you are no longer the owner. The business belongs to and will be run by someone else. For some founders, that shift is welcome. They are ready to retire, step back, or redirect their energy into a new venture. Others may not want a clean break at all. They may simply need a financial partner with deeper operating experience to help the business reach its next stage.

Before signing a Letter of Intent (“LOI”), a founder should ask a hard financial and personal question: am I truly ready to walk away, or do I need a reset with a strong financial and operating partner? In this installment and the next, we will explore the differences. Our upcoming piece will look at the majority sale with rollover interests, a structure that lets a founder take meaningful chips off the table while still participating in the future of the business.

WHAT DOES A 100% EXIT LOOK LIKE?

Whether you sell all of the stock or assets, the outcome is the same. You have no voice in what happens next. There often is no board seat waiting for you, and no ability to step in later because you disagree with the new owners. It is a clean break, by design. That is why it is worth being honest with yourself about whether a clean break is truly what you want.

START WITH THE LIFE YOU WANT AFTER CLOSING

Founders understandably spend a great deal of time thinking about valuation. But before deciding whether a full exit is right, it is worth spending time thinking about what happens after the sale. Is the purchase price, paid at closing or through a non-contingent note, enough to support the future you want?

Do you want to retire immediately, or do you expect to start another business, invest actively, join another company, or pursue a second career? Those questions can shape the transaction itself.

“I spent 42 years building my practice: the client relationships, the team, all of it. When I decided to sell 100%, I figured the hard part would be negotiating the price. It wasn’t. The hard part was accepting that once it closed, I didn’t have a say in how it ran anymore. Looking back, what I wish I’d spent more time on before signing wasn’t the number. It was figuring out what I actually wanted my life to look like afterward. That’s the part nobody really warns you about.”

— Mark Goodin, Founder, Goodin & Associates, LLC

Buyers commonly ask sellers to agree to noncompete and non-solicitation restrictions. These can be reasonable in a full exit. The buyer is purchasing the business’s goodwill and should not have to compete with the founder immediately after closing. But a founder who expects to build another company may need narrower restrictions than one who plans to retire. Scope, duration, geography, and permitted activities matter.

The same is true of the seller’s role after closing. A buyer may want the founder to remain for a period of time to introduce customers, assist employees, or help with the transition. That may be sensible, but it should be clearly defined. A short transition period is very different from an open-ended expectation that the founder will continue running the business. If the goal is to leave, make sure the deal actually lets you leave.

TAX MATTERS CAN CHANGE THE ECONOMICS

The difference between a stock sale and an asset sale can matter significantly for your tax bill.

In a stock sale, the seller generally recognizes gain or loss on the ownership interests sold. In an asset sale, the purchase price is allocated among the assets being acquired, and different types of assets can produce different tax consequences.

The structure can affect both the buyer and seller, sometimes substantially. Character of gain, basis, depreciation recapture, state taxes, and purchase price allocation should be evaluated early. Tax planning should begin before the LOI, when there is still flexibility. Once the parties agree on the basic structure and economics, there may be far less room to adjust them.

THE SPECIAL PROBLEM OF AN EARNOUT

One issue deserves special attention in a 100% exit: the earnout.

An earnout is additional purchase price paid on the condition that the business achieves specified results after closing. Earnouts exist to bridge a valuation gap. They can be useful. But in a full exit, they create a unique problem. The founder no longer controls the business or has automatic visibility into its performance.

If part of the purchase price depends on future results, the founder is being asked to bet on a business run by someone else. That does not make an earnout inappropriate, but it does mean the earnout provisions need careful attention.

The seller should understand precisely how milestones will be measured, what accounting principles will apply, and what the buyer can and cannot do during the earnout period. The agreement may need covenants that prevent the buyer from undermining the earnout, information rights that give the seller visibility into performance, and a straightforward dispute resolution mechanism. A provision that lets the buyer run the numbers and hand the seller the result is very different from one that provides access to underlying data and a neutral way to resolve disagreements.

The underlying issue is trust, but the documents should not require the seller to rely on trust alone when part of the purchase price is contingent.

LETTING GO

A 100% exit is sometimes described as a financial transaction. It is that, but it is also personal.

You are selling the entire business and giving up the ability to make the decisions that shaped it. For some founders, that is liberating. For others, it is unexpectedly difficult.

The best time to think about that transition is before signing the deal.

Know what you need financially. Know what you want to do next. Understand which restrictions will follow you after closing. Understand what you are giving up when you transfer ownership. And if part of the purchase price depends on what happens after you leave, make sure the agreement gives you enough transparency and protection to know that the earnout is being calculated fairly.

A successful full exit is not simply one in which you receive a good price. It is one in which you can close the door on the business with confidence, financially, legally, and personally, and move on to whatever comes next.

This is the third piece in our Exit Series, where we’re breaking down the paths privately owned businesses can take toward a transition. Next up: Majority Sales and Rollover Interests.

Connect with us on LinkedIn to follow the rest of the series.

Doug McCullough, Partner, McCullough Huddleston and Woo

Emily Harris, CPA, Managing Partner, Wayfinder Strategic Advisors

Investment Banking Services and Securities offered through Independent Investment Bankers Corp., a broker-dealer, Member FINRA/SIPC. Wayfinder Strategic Advisors is not affiliated with Independent Investment Bankers Corp.