This is the second article in our series about how to begin the process of finding the right buyer for your business. In the first article, we discussed the options that might be available to you and some of the key decisions you will need to make. Now, let’s look at a case about a business with multiple owners who are going through the process of determining their best exit option and how to find the right buyer for their business.
The three owners of a 50-year-old professional services firm started looking at their exit options a little more than a year ago. Their well-established business is not family owned and has successfully gone through a number of internal transfers to key employees over the years.
The owners decided to start exploring exit strategies because with three owners, things are complicated. Each owner has a different timeline for exiting – adding another level of complexity to the situation. One partner wants to cash in her chips within 2 years, one wants to stay for four more years, and the third is planning to stay for 5-7 years.
This is clearly a huge decision that will affect the lives of all three owners and their families, not to mention their management team and employees. A key factor in their decision is what can they afford, but there are numerous other considerations they are taking into account. After calculating the estimated outcome of multiple exit scenarios, they believe they have three options that would likely satisfy their Wealth Gap or financial needs – two internal sale options (Management Buy Out and Employee Stock Option Plan) and one external (Sell to a Third Party).
Weighing All the Options
With so many different options, how do they decide? As a next step, the owners used our Comparison of Ownership Transition Options tool to further evaluate each sale option.
Some of the characteristics they evaluated included:
- Owner timelines for departure
- Income Streams for each partner
- Tax planning Opportunities
- Purchase price payment timeline
- Risk of non-payment
- Chance of consummating the transaction
- Level of owner control and future involvement
- Management & employee impact
- Disruption to business
The owners have devoted considerable time to weighing the pros and cons of each of their options in order to ensure that the strategy they ultimately choose will help each of them achieve as many of their goals as possible while maintaining the continuity of the business.
They are having a good year and will likely put a “teaser” out to the market, as a next step. This will allow them to find out, for sure, what kind of price they are likely to receive from a third-party and what kind of buyers they may choose to work for. If conditions aren’t favorable, they will be able to switch gears towards one of the internal options.
The owners in this case are extremely fortunate that they have three options available to them. Not many business owners find themselves in this situation – especially with three owners on different timelines. In this scenario, there is a very real chance for conflict among the owners with disparate goals but they are all working well together to determine an optimal outcome.
Because they are so proactive with their exit planning, these owners have the time to consider all of their options and prepare themselves and the business for whichever strategy they choose.
As an owner, you don’t want to be put in a situation where quick decisions need to be made without the time to consider all of your options. Planning well in advance of your exit will enable you to understand the pros and cons of each scenario, determine the suitability for your situation, and do the math!
Stay tuned for Part 3 when we find out which options these owners choose and their outcomes!