Many owners of privately held businesses desire to keep the ownership of their company within the family. Unfortunately, keeping a business a “family business” proves to be quite difficult with just slightly more than 30% successfully making the transition into the second generation. Sometimes the business creates a divide among family members, or perhaps the next generation just isn’t that into the business.
Luckily for business owners, there are options to sell the business both internally and externally. Both have their own pros and cons, so there is never a “one size fits all” solution. Business owners can often benefit from working with an exit planning adviser to determine what the best options are for their situation based on their priorities. Is the goal to achieve the maximum price for the business? Does the owner want to take care of the loyal employees who helped the business achieve success? Is a tax-efficient transaction the top concern?
Internal methods of exiting your business include transferring ownership to family members, selling to family members or other stakeholders, selling to an employee stock ownership plan, or a management buyout. These transactions tend to be smoother for existing employees, customers and vendors, and result in the best attitude, morale and productivity. However, in some cases, the funds may not be available to buy the owner out in one transaction, and in some of these cases, the sale can take several years to complete.
External options can include selling to a private equity group, a strategic buyer or a competitor, or even going public. A private equity group will not likely offer top dollar for the business as they are more concerned with making money for their investors. Selling to strategic buyers or competitors can often yield the price an owner wants, but the change in culture for the business can be a shock to employees and customers. Long-term employees could be let go, and long-standing vendor relationships or contracts could be severed.
Business owners also need to consider the terms of the sale. When selling to a private equity group or a strategic buyer, they may want the owner to stay on for several years. This can be difficult for a business owner who is accustomed to being the boss and making financial decisions, as management of the acquirer will likely be driving the decision making post sale. Furthermore, if there is conflict, the new owner can fire the previous owner during the buyout period, which could alter the ultimate sale price.
Another point to consider is how long a business exit may take when selling a company. If a business owner has not started planning, it could be up to a three- to five-year process. If there is existing interest from a competitor or private equity group, a sale could be completed in a shorter time frame. Business owners may also need time to unwind their personal finances from the business finances to improve the attractiveness of the business to potential buyers. Working with an exit planning adviser and a valuation analyst can help business owners position the company for sale.
An exit planning adviser can also help owners move past the emotional bias they may have toward potential buyers. If a top-dollar offer is needed for the owner to retire comfortably, offers from a competitor may need to be entertained. Furthermore, the buyer will likely have experts advising them on the transaction; therefore, so should the business owner.