By: Brian MacMilllan | Managing Director Mergers & Aquisitions
Selling a privately held business is complicated. If you are a business owner, understanding the options available to you when selling your business can make a huge difference both in how much you receive from the sale and in the business’ long-term success.
Each business is different, and each business owner’s personal situation is unique as well. The more you know about your options and the earlier you determine which path will be best for you and your business, the better the odds your transition will be successful. Here is a summary of three major methods for transferring ownership, and some of the pros and cons of each.
KEEP IT IN THE FAMILY
Many parents who own businesses dream of passing them on to their children when they “come of age.” Realizing this dream can be a daunting task, and many questions need to be answered if a transition of ownership within the family is to be successful. Two of the most important questions are: do your children want the responsibility of business ownership, and are your children prepared to run the business? Your employees rely on your business for their livelihood, so be sure that whoever takes over will not put their jobs at risk. Also, if you have multiple children, consider whether some of your children are active in the family business and some are not. Determining how you distribute the value of the business evenly is a difficult and personal process that can potentially drive families apart.
KEEP IT IN THE COMPANY
If they are willing and able, selling your company to the employees who know it best could be a good option. You could do this by selling to a manager or management team or by selling the company to all of its employees through the implementation of an employee stock ownership plan (ESOP). In any case, the same important question needs to be asked: are they prepared to run the business?
Structuring the sale also becomes an issue when selling to management, as they frequently do not have the capital to pay for the business up front. Depending on your business, management might be able to get financing so that you will get paid at the closing. The same issue of getting paid for the sale arises when selling to family members.
A few things to note: Whether selling the company to family members, management, or all employees, the value of the business will always be an issue. Having a valuation done will determine the fair market value for the business. (In the case of an SOP, a valuation will need to be performed annually.) Also, keeping the business “in the family” or “in the company” might allow you to set up more favorable tax strategies, as you will have more control over the process—especially when compared to selling the company to a third party.
SELL TO A THIRD PARTY
Third-party buyers can come in many forms. As a result, the amount they offer for your business—along with the structure of the sale itself—can vary dramatically. The most common third-party buyers are other companies within your industry (sometimes, competitors), private equity companies, and high-net-worth individuals.
Companies from within your industry are sometimes considered “strategic acquirers.” As such, they might be able to offer you a premium for your business if they see ways that it can be expanded through synergies with their own business. In this scenario, there is a chance that some redundant employees could be let go in order to make the combined entities more profitable, but this happens far less frequently than most sellers think.
Private equity companies frequently want you, the current owner, to stay on board and help them grow the business, unless there is a capable management team already in place. This can be an attractive option for many business owners who want to take some of their chips off the table now (i.e. sell a portion of the business) but continue their involvement and take advantage of further growth. Another advantage of private equity companies is that they can inject more money into the business. They frequently have extensive industry experience, which you can use to grow the business much more quickly than you might have been able to do on your own. Of course, there are many nuances to consider when taking on a private equity company as a partner.
High-net-worth individuals, who often come from management at larger companies within your industry, can also be attractive buyers. They might not be able to offer a “premium” for the business, though, as they usually rely on financing to complete a transaction. They can, however, offer continuity. And the potential number of high-net-worth buyers has recently expanded, with the U.S. Small Business Administration (SBA) increasing the maximum of their 7(a) loan program to $5 million. But as with the other options, when selling to a high-networth individual, understanding his/her ability to run the business is crucial.
CONCLUSION
If you understand your options long before a sale is imminent, you will be in a stronger position when the time comes to transition out of the business. There are some limiting factors to keep in mind, such as whether you have a family member interested in the business or if your company is big enough for a private equity company to be interested. As mentioned previously, each are unique, so it is important to speak with a trusted Merger & Acquisition Advisor to determine what makes the most sense for
you, your family, and your business.