Many business owners start their businesses with the idea of running them until they retire. This often occurs. However, many small-business owners sell their businesses in advance of retirement due to family or health concerns, boredom or an inability to move their companies to the next level on their own. Business owners with healthy, stable, profitable companies have several buyout options they can use to exit their businesses.

Management Buyout

Business owners who hired and relied on one or more executive managers -- for example, a general manager -- can sell out to that manager in what is called a management buyout. Many financing entities prefer to fund management buyouts of stable, growing companies because the risk of default is typically less. In a management buyout, also referred to as an MBO, the ownership of the company changes, but the management team that led the company remains and becomes fully vested as owners.

Employee Stock Option Plan

Small-business owners with loyal employees who have expressed an interest in owning the company can engineer a buyout of their ownership stake in the company through the creation and funding of an employee stock option plan, or ESOP. The owner establishes an ESOP and contributes all of his shares to the plan. The company then contributes the cash to buy the stock or, more often, enters into a loan agreement to borrow the funds to buy the stock. The company repays the borrowed funds. The owner gets the cash and the company owns the shares until the shares are granted to employees.

Recapitalization Or Leveraged Buyout

If a business has multiple owners, one way for one owner to buy out the other or for a group of owners to buy out a partner who wants to leave is through a recapitalization. A recapitalization, also known as a recap for short, replaces equity with debt, changing the company's capital structure. This gives the process its name. A company must have steady operational cash flows and, in some cases, high-quality assets, to qualify for a recap. The company will use those cash flows to pay down the debt it takes on. A recap is also a type of leveraged buyout.


The IPO process can be time-consuming and expensive. More companies can successfully go public and attract interested buyers through the use of private investment in public equities, or PIPEs. Small businesses with higher revenue levels -- for example, $8 million to $20 million -- and steady growth hire an investment banker. That banker often uses a reverse merger -- where a private company merges into an existing, but non-operating public company -- to go public. The banker interests primarily hedge funds in investing in the company. On the day of the reverse merger, the hedge funds purchase shares in the newly public company. The PIPE option is less costly and faster than a traditional IPO.