While this seems like a pretty simple question, it contains many different variables and requires thoughtful consideration. For instance, the third-party sale typically results in the highest gross sale price for a business while the internal transfer method usually carries a lesser gross sale price. So external is better, right? Not always. Most business owners believe that the highest sale price is what you should seek. But that can be a costly misperception. You need to understand what you likely will net from your potential transfer method. And you need to carefully and equally assess the non-financial characteristics of a potential method. The decisions you make will affect your employees, your legacy, your family, and ultimately, your future.
Goals and Objectives
In previous blog posts, we mentioned five of the most common types of external and internal transfer options. With so many options, how do you know which is right for your situation? How do you decide? What do you need to consider? We like to think that these questions fall into two distinct categories; the financial and the non-financial and some examples are;
- How much do I need to net from my transition?
- How much will I net from the option I choose?
- Will my transfer option provide enough to support my desired lifestyle?
- What will happen to my employees?
- Will my business remain in my community?
- Do I want to remain involved with my business after the transition? If yes, for how long?
- Could I work for a new owner?
In the complex world of business transitions, crafting a transition strategy that effectively addresses these areas together is an intricate challenge. If you primarily focus on one category of objectives, such as the financial, and do not place adequate importance on the other, your result can be an unsatisfactory outcome. Therefore, identifying and analyzing your goals and objectives is a critical first step in determining your best transfer option.
The next step is to understand what the different options offer in terms of financial and non-financial results.
- Highest sale price
- Highest taxes and transaction fees of any method
- Can provide a lump sum
- Most difficult to accomplish—lowest success rate
- Loss of control
- Loss of business continuity
- No control over employees’ future employment
- Lower sale price than the external option
- Low taxes and some internal options have great tax advantages
- Low transfer fees
- Built-in buyer—higher probability of transition
- Can stay involved with the company or employed
- Provides business continuity
- Provides for employees
In this brief overview, you see that the methods have very different characteristics. Merely looking at this list could lead you to some incorrect and incomplete assumptions, however. For instance, while the external option can have the highest taxes and fees, it may also provide you with much needed liquidity. By comparison, an internal option may offer great tax advantages but if you do not have an established successor in place or a strong management team, it likely cannot be accomplished.
In our book Cashing Out of Your Business, we have devoted an entire chapter, entitled “Yellow Brick Road,” to exploring in greater detail the characteristics of these transfer options. It also includes an actual case study of an owner who was seeking to answer the very same question: “How should I transfer my business, sell externally or transfer internally?” We encourage you to read her transition story; it will provide you great insight into another owner’s search for answers.
The question of whether you should sell internally or externally cannot be answered superficially. The suitability of any transfer option can only be determined by establishing your financial and non-financial goals and examining your entire situation from a holistic comprehensive viewpoint. This takes time, planning, and most likely, the assistance of professionals trained in the transition planning process. The real question is not if you will leave your business one day; it is if you will have chosen the method through which you leave. If you're a few years away from retirement, the time for planning is now.