If you are considering selling your business, you may be under the assumption—held by most small business owners—that selling to a third-party buyer is your only option, but it may not be. In reality, a third-party sale can be the most difficult to achieve and can actually be the more costly option. Perhaps more importantly, it may not satisfy your objectives, including:
- Financial (how much money you need)
- Non-financial (what is important to you)
You may have several different selling options, and it’s critical that the option you choose is aligned with both your financial and non-financial goals in order to accomplish a successful sale. There are 5 predominant options for selling your business, some internal and some external.
Internal Sale Options
You can sell your business internally to someone inside the company: management, employees, or family members. In general, internal transfers provide a sale at a lower gross price, but may produce a greater net sale price due to tax and fee minimization.
- Management Buy-out or Leveraged Buy-out
The sale to your management team usually requires that either you provide financing in the form of a seller note (MBO) or a bank provide the funds in the case of the LBO, for the purchase of your business. You may remain involved for a period of time.
- Employee Stock Ownership (ESOP)
This type of internal sale does not necessitate selling your stock directly to the employees as the name implies but, rather, to a trust for the benefit of the employees. It can offer the greatest tax advantages and flexibility for an owner because you do not have to sell the entire company or relinquish control.
- Stock Redemption Plan
This is similar to a management buy-out but involves selling your shares over time. This option can have tax advantages, especially in the case of S and C corporations. Three key elements must be in place: company profits, ample time, and trust between the parties.
External Sale Options
- Sale to a Third Party
This can be to an individual or another company and can provide the highest sales price, but not necessarily the highest net proceeds. You generally will not be involved with your business for very long after the sale.
- Private Equity Recapitalization
This usually involves a group of investors purchasing a portion of your business, usually more than 50% and up to 80%, while you retain some ownership for a period of time. Private Equity Groups (PEGs) generally want an owner to remain involved for a period of 3‒5 years, at which time the company will be taken to market again theoretically enabling you to get a “second bite of the apple”.. Things don’t always work out as planned but this may be a good option for an owner who wants to sell to a third-party, and remain involved with the business for a few more years.
When considering your options for selling your business, the financial considerations are usually the focus and come with a false assumption that the higher the sales price, the higher the net proceeds. But this isn’t necessarily true. In fact, most business owners don’t know how much money they really need to net from their business sale to achieve their financial goals.
The key here is net, which is defined as:
- Gross sale price
- Less the payoff of company debt
- Plus retained assets
- Less all selling expenses
- Legal fees
- Transaction fees
- Less Taxes
- Equals NET proceeds
Taxes and transaction fees can cause the largest reduction in your business sale proceeds. Unfortunately, most owners don’t realize this early enough.
The non-financial issues are equally important and, if not considered, can contribute to “seller’s remorse,” which most often occurs when the seller no longer feels relevant which causes a sense of emptiness and regret. This can be avoided if owners start preparing themselves well in advance of the sale.
Identifying Your Best Exit Option
There is no easy way to decide which exit option is best for you. It’s a complex issue, which requires analysis and integration of your current situation with your future financial and non-financial goals. The best way to determine your optimal exit option and the steps required to achieve it, is through a comprehensive, holistic exit planning process.
For an in-depth look at our recommended six-step process, we encourage you to read our book, Cashing Out of Your Business. Without the proper knowledge and preparation, you may limit your options and compromise your success in selling your largest asset: your business.