I had a prospective client come to me the other day. His question: How much can I get for my company? However, it isn't that simple and a company is only worth what someone is willing to pay. So, you may find yourself in 6 scenarios with 6 different ways to sell your company. Here are a few considerations as you start to develop your growth strategy or consider your exit.
1. Internal sale to a family member - This can be the most simple or the most difficult. Control, expectations, and emotions are what drive that end result. Additionally, not planning out the seller and buyers future financial picture can lead to stress if the buyer assumes responsibility for the selling family member in the future (parents or surviving parent). In some instances, the seller determines the price so that the buyer will succeed. Current and future tax consequences need to be weighed out, control and transition should be designed well in advance, and open and honest communication needs to be in the equation. Continuity plans, advisory boards, options for the success of the next generation should be designed well in advance of your exit, 2-5 years being ideal. Mismanaged transition planning often leads to infighting, mismatched expectations, the buyer walking away, terrible Thanksgiving dinners, and stress to the family that can be easily avoided. In the end, the price can be more tax favorable over time, leading to a higher output for the seller.
2. Internal sale to a partner(s) - If you haven't already put together a partnership agreement - stop reading, call your attorney, and get underway. Better yet, call me and I will direct you to the right attorney for the job. Too many partnerships have dissolved because of this. A predetermined exit formula to price the business and sell out should already be set. These can be revised as the business grows, but should never be left to chance and trust of the other party, especially in the case of one of you prematurely passing. Your family may never get the true value of all your hard work.
3. Internal sale to employee(s) - there are a few ways that you can set up internal sales. Two of the most popular are direct sale or employee stock ownership plans (ESOP's) - Depending on the size of your company and if you have identified a true successor (or a few), you may be presented with these 2 options.
- Employee Stock Ownership Plan, or ESOP, is an expensive but tax favorable method and usually works best with larger, more profitable companies. They are complex, but if you haven't identified one true successor to purchase your business, your organization can continue to run with a leader who has ownership along with employees who have smaller shares of ownership. This makes all parties in the company beneficiaries of the company's success.
- Direct internal sale's can be similar to number 1. Sellers beware - take the emotion out of the transaction and use a professional to broker the deal (CPA, attorney, broker, or experienced financial advisor). Common "blow ups" result from the seller's need for control, arrogance/pride of ownership leads to emotional responses, seller gives too much upfront information leading the buyer to feel like he/she is in the driver's seat.
4. External sale to a new business acquirer - Selling it to someone who wants to get into your business or wants to use your business to get out of a job can be a lucrative situation. However, depending on the type of business you have, they will be taking on all of the overhead as well. This could lead to a compromised sale price. Additionally, if the buyer can not come up with all of the money and the seller needs to help finance it, the seller may end up getting the very business back that they were hoping to be rid of. This could create for a lucrative opportunity (keeping any up front money, taking the company back at a discount, then rebuild), but generally leads to more stress and more often is not a money making proposition. Understand the variables that are at play and the experience of the buyer, especially if they can not come up with all of the money.
5. External sale to an established company - this is where you look for a synergistic company that can take on your business and fold it into their existing business. Depending on your market, that could call for a greater valuation because of the increased profitability of which the acquiring company can reap the benefit. This also means the acquirer is more sophisticated and knows your business better than an outsider, so they will pick apart the business and try and look for the best deal possible.
6. Liquidation - this will be the value of whatever assets are left if the business is not sale-able. This can be especially trying in the case that the owner predeceases a good exit strategy plan and the family is unable to do something in time to keep the business going. I would add a fire sale in this category as well. That is when the acquirer knows the level of desperation the seller has and takes advantage of it to get the best price. Avoid this by planning your continuity when you open your business and revise it as time goes on. Learn how to engage your key people, create an advisory board, and put together a buy/sell with a partner, key person or friendly competitor.
Be in the driver's seat. Get a continuity plan together, develop your team, and understand when and how you want to exit your business. The educated and prepared business people get the better deals! They also understand what dollar amount needs to be on the check for them to live the life they want. It's never to early to plan.
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