There are many reasons why business owners consider exiting a business. Before making a decision, consider the true reason that’s driving your ambition to sell, what kind of buyer you’re looking for, and whether the timing is right.
Perhaps the business has been your life’s work. You started out in a basement workshop and now you have a small, but thriving business. You’ve invested all of your time and money into building the company. Now, you’d like to free up your assets and enjoy a well-deserved retirement.
Maybe you have an entrepreneurial spirit. You love the excitement of turning ideas into viable businesses, but you find running a company day-in and day-out to be tedious. Or you’re ready to start a new chapter for financial or personal reasons. You want to free up your assets for a different investment. Or it’s health-related. Your doctor says it’s time to reduce the stress in your life.
Your rationale for selling will help you identify the right buyer.
Do you want to guarantee the family business remains virtually unchanged? Are you committed to protecting your employees’ futures? Are you more interested in maximizing your return on investment? Setting your priorities first will help guide you through the selling process. Consider potential buyers – family members, employees, a private equity group, etc. – and the potential pros and cons they could bring to the sale. We outline several for consideration below.
Download your free exit planning workbook today!
Some owners want to keep the business in the family. They offer their children, or a child who’s been directly involved in the business, the opportunity to purchase the company.
Sometimes they want to give the company to family members. Or they want to set up a succession plan that enables their children to run the company when they inherit it. This can be a great opportunity to continue a family legacy. It can also be the cause of heartache and broken relationships.
Less than one-third of businesses survive the transition from the first to the second generation. Fewer make it beyond that.
Even when all parties appear to agree, involve a lawyer and an accountant, each with M&A expertise, to structure the agreement in a way that’s financially appropriate for all parties involved. They can also help minimize the tax implications.
It’s typical for family-owned businesses to make financial compromises to keep the company within the family. This may include gifting shares to the family, selling the business below market value, or financing the debt over a long time frame to make the transaction viable. If one family member exits the business while others remain, the company can borrow to purchase the outgoing family member’s shares, and then pay down the debt as the company continues to operate.
Some business owners identify a manager or management team that’s interested in purchasing their business. Others want to sell to their employees, making employee-owners of their entire team. This idea has intrinsic value, but also comes with potential pitfalls and financial complications.
Remember, lawyers and competent financial advisors should always handle financial negotiations to avoid unintended consequences.
Private equity group
Private equity groups use investment capital from individuals and institutions to acquire ownership in companies. You should know that your company may never look the same if you sell to a private equity firm. Their goal is to maximize their return on investment.
They may make financially driven changes to a business that a seller may not have considered or may not like to see. This could include selling certain assets, taking on large amounts of debt, maximizing current cash flow, or combining your company with other similar companies to gain synergies.
These moves could impact the job security of your management team and employees.
Employee Stock Ownership Plans (ESOPs)
ESOPs are qualified retirement plans. They allow business owners to sell some or all of their company stock to the ESOP which allows employees to gain ownership in the company. A sale to an ESOP can provide significant tax and competitive advantages to the seller, as well as the company.
A buyer who’s interested in purchasing your business for strategic reasons could be one of your local competitors or another business looking to expand regionally. The advantage of this arrangement is that the purchaser understands the industry and what’s needed to make your business successful.
Negotiate with your eyes open. The purchaser may rebrand your business and may eliminate overhead redundancies to maximize their return on investment.
Again, think about what why you want to sell your business to help you identify the right buyer. If you can understand their goals and motivations, it can help you strike a deal that’s advantageous to all parties.
Have questions about selling your business? Let’s talk!