Many business owners have preconceived notions about who will buy their business or whether it’s even sellable at all. A lot of owners think their most likely buyer option is the competitor down the street. Maybe that was true, once upon a time. But the M&A world has changed dramatically—and continues to evolve.
Today, when we talk about selling your business, we’re really talking about a wide breadth of options. This is not an all-or-nothing scenario—you can sell all of the business, or just some of it. You can sell it all but stay on as an employee or a consultant. You can sell to a private equity firm and to your kids at the same time. There are so many options.
And your local competitors are usually not the only buyers at the table. According to the Market Pulse Report sponsored by IBBA and the M&A Source, if your business is valued $10 million or more, you have about 75% chance that your buyer will come from over 100 miles away.
How well do you understand the exit options available in today’s market? Here’s an overview of seven common exit strategies and the pros and cons of each:
- Sell 100% of your business, third- party sale. Pros: You can typically sell for a higher value in a competitive auction-like environment. And you get to move on to your next chapter without any business responsibilities hanging over your head after you transition out post-sale. Con: It can be emotionally challenging to let go of something you’ve invested so much of your life in.
- Sell the majority of your business/recap. Some owners sell but retain an equity stake in the business. Pros: Allows you to take some chips off the table and diversify your assets. By keeping a share of the business, you get an opportunity to stay involved and help a new owner grow. Later, you could gain even higher returns when the business sells again. Cons: You may struggle with not being the chief decision-maker anymore.
- Sell to your children. Pros: A business transfer to children or other family members is a great way to ensure your culture and legacy remain intact. You get to share a valuable asset with people you love and will probably have ongoing opportunities to stay involved. Cons: Your children may not want the business and may feel pressured to take on something that they have no real interest in. Selling to your kids typically involves a gradual payout, oftentimes over 7-10 years, meaning tension and loss if business performance declines.
- ESOP/Management buyout. Pros: Selling to employees or leadership has similar advantages as selling to family. You share a valuable asset with people you’ve come to know and respect, and you know the business will be in the hands of people you trust. ESOPs also come with tax advantages that selling to an external buyer does not offer. Cons: These deals often require a high level of seller financing, meaning you could be deferring your total compensation for 7-10 years. ESOPs are fairly expensive to establish and maintain and if business performance declines, you might not get paid.
- Divestiture. Selling off a product line or division can diversify your investments and alleviate some of the pressures of ownership. Pros: You maintain strategic focus on your core business. Cons: You may have to make talent adjustments if employees were working for multiple business units. Plus, your remaining business will have to absorb fixed costs that were previously shared.
- Shutdown. Pros: By selling off your assets, you can eliminate debt and put a cash reserve in the bank. This is the simplest option and can be executed immediately, without waiting. Cons: Liquidating your assets may generate far less value than you could have received for an ongoing operation. This option also results losses of both jobs and legacy and residual impacts on the community.
- Death or disability. Pros: None. Cons: Leaves your grieving family with significant burdens and responsibilities. Often results in a significant decline in value before the business is sold.
Advance planning can make or break a business transition. Think about how you might want to exit your business someday, then talk to an advisor about how to make that happen. An M&A advisor can provide an accurate business valuation, show you how to increase that value, and help you shape a strategy that best fits your overall goals.
By Steven Pappas – Touchstone Advisors