Selling Your Business. This is the fourth in a series of articles that will provide information to business owners who are starting to think about exiting their business. Should you wish to learn more about how to plan for your exit, contact Donald Stevens at firstname.lastname@example.org or visit http://www.donaldstevenscfo.com/.
Now that you are pretty sure that you have a saleable business, the next question is who you should sell it to. In the second article in the Selling Your Business series “Are Your Ready to Sell Your Business? You Sure?” https://www.losangelesorangecountyb2bcfo.com/are-you-ready-to-sell-your-business-you-sure/, I discussed determining both your financial and mental readiness to sell your business. This readiness will help determine the most appropriate buyer of your business to meet your objectives. This doesn’t necessarily mean that in selling your business that you will be able to attract the type of buyer that most meets your objectives. In this article I will discuss the primary types of buyers and their motivations.
At the highest level, there are two types of buyers, internal buyers and external buyers. An internal buyer is associated with the business or its owner. An external buyer doesn’t have a direct connection to the business or its owner.
Internal buyers may include family members, trusted employees, and employee stock ownership plans. A common characteristic of internal buyers is that they generally do not have the financial resources to outright buy the company. They may need to rely on external financing, seller financing or both. The purchase price internal buyers will be able to pay is also generally lower than external buyers may be able to pay. This is due to the lack of financial resources for family members and trusted employees and in addition, regulatory requirements related to company valuation for employee stock ownership plans. The internal buyer will need to primarily rely on the cash flows of the business to fund the debt service. As such, these cash flows place a cap on the sales price.
Why would I sell to an internal buyer if the sales price is low and I must assume the risks of financing the purchase? There are several reasons you may decide to sell to an internal buyer:
- You have a high level of financial readiness and want to pass on your legacy to your children or trusted employees who have essentially become family.
- You have a low level of emotional readiness but would like to monetize some or all your ownership. In this case selling to an employee stock ownership plan may allow you to achieve the monetization you seek but allow you to retain management control. This option may have favorable tax benefits.
- Selling to an external buyer is unlikely and this is the only option to sell your business, even though it comes with risks.
- The likelihood of a successful sale may be higher due to lower thresholds for due diligence. Because the internal buyer knows the business well, the need for a thorough due diligence process is reduced. In addition, the internal buyer will have an emotional motivation to acquire the business which may result in the internal buyer accepting risks that an external buyer would not.
In my first article of this series, “Beginning with the End in Mind” https://www.losangelesorangecountyb2bcfo.com/selling-your-business-begin-with-the-end-in-mind/, I told you a story about Joe who had a serious medical condition resulting in the need to sell his business at an unexpected time. Joe sold his business to his employee Greg primarily because he had no other option. This sale had many of the characteristics described above regarding an Internal Buyer.
External buyers may include strategic buyers, financial buyers and private equity groups. The common thread between these buyers is that they do not know your business. As such, a thorough due diligence process is to be expected where you will need to provide an extensive amount of information to the potential buyer so that they become fully informed on what they are buying.
Strategic buyers are interested in your business for a strategic purpose. Their motivation may include entering a new line of business, geographic expansion, elimination of a competitor, acquisition of intellectual property, etc. Their expectation is that 1+1=3. That this acquisition will allow them to achieve their objectives faster, cheaper and more effectively than building it their selves. For this reason, strategic buyers will generally pay more for a business than any of the other types of buyers.
For the business owner that has a low level of financial readiness and a high level of emotional readiness, this is the buyer for you. If you can find them.
The financial buyer’s motivation is to acquire companies that they can run for five to seven years, grow revenues and / or reduce expenses and then sell for a profit. They will often be agnostic to type of business, but not always as some specialize. They will have a financial return objective that will establish the maximum price they will pay. Financial buyers are skilled in the process of acquiring businesses. They will negotiate hard on price. They will be efficient and thorough in the due diligence process. They will tend to be less flexible with contract negotiations. The financial buyer is also the type of buyer that has the highest likelihood of walking away from a deal that doesn’t meet their exact expectations.
Because the financial buyer doesn’t necessarily have a strong background in your business, s/he may ask the business owner to continue with the company for some period. As such, this may be an appropriate buyer for a business owner that has reasonable financial readiness but is a bit conflicted on the emotional readiness side.
Private Equity Groups
Private equity groups can be strategic buyers or financial buyers and act similarly as discussed above. In addition, there is a strategy for business owners to partner with a private equity group to recapitalize their business, or a PE Recap. A typical PE Recap will entail the business owner selling approximately 80% of the business to the PE firm. The PE firm will fund the purchase price with a sizable portion of debt which they will push down to the company. Like a financial buyer, the PE firm will have an exit strategy for the business. The business owner is expected to stay on with the Company as an employee until the exit strategy of the PE firm can be executed.
This strategy works for business owners that want to monetize a significant stake in their companies but have a low level of mental readiness to exit their business. The additional value of this strategy is that the business owner gets two bites of the apple. The first when selling to the PE firm and the second when the PE firm sells the business.
In my first article of this series, “Beginning with the End in Mind” https://www.losangelesorangecountyb2bcfo.com/selling-your-business-begin-with-the-end-in-mind/, I told you a story about Greg who after buying the business from Joe, put in place a strategic operating and exit plan. Greg sold the business two years after he acquired it to a Strategic Buyer who was looking for a platform to service a client segment that they did not have exposure to. This strategic buyer paid a multiple at the top of the range of what businesses were being sold for at the time.
Are you ready to sell your business? Would you like to learn more about which buyers may be most appropriate for your business? If you are ready to start planning your exit now or would just like to know more about what exit planning is all about, contact me, Donald Stevens at email@example.com or visit http://www.donaldstevenscfo.com/.
B2B CFO® https://www.b2bcfo.com/ has several resources that educate business owners, assist in developing exit strategies and ultimately assist in the execution of those exit strategies for owners of privately held businesses. These include The Business Sale Solution Seminar™ which is an educational program developed to prepare business owners for the journey they will take when selling their business. The Exit Strategy Handbook is a companion to the Seminar, providing further detailed information on selling your business. Our B2B Exit® Software serves as a project management tool and an internal valuation tool for preparing your business for sale. Most importantly, there are the B2B CFO® Partners, 220+ strong, located across the USA, each a highly experienced financial professional, and ready to guide you through this adventure.
Are you ready to begin planning for your eventual exit from your business? It is never too early to plan. Contact Donald Stevens, a B2B CFO® Partner, at firstname.lastname@example.org or visit http://www.donaldstevenscfo.com/.