MAKE A PLAN, STAN
Paul Simon says, “There must be 50 ways to leave your lover.†There may not be quite that many ways to leave your business, but these are some of the more common:
1. Sell 100 percent of your business. You can sell the whole company, but remember, you won’t get to walk away immediately. Expect to invest several months in a transition period or longer via a consulting contract. And don’t expect to get all cash at close. Most business owners are funding 10 to 30 percent of a purchase price through seller financing or earn out agreements.
2. Sell the majority of your business. Some owners sell a majority stake when they see an opportunity to maximize value or want to diversity their investments. By keeping a minority share, they get an opportunity to stay involved in the business and help a new owner grow. Then, down the road, typically 5-7 years, they get another bite at the apple when the business is sold again. Look for a buyer who is better capitalized or staffed for growth, and you could realize greater returns on your minority stake than if you had sold the full business at once.
3. Sell a minority stake. It used to be finding a minority investor was a matter of personal networking and who-you-know. But selling minority shares, as part of an organized sale process, is growing new trend. Investors have capital they need to put to work, and this is one new way they’re making that happen.
4. Sell to family members. A business transfer to your children or other family members is a great way to ensure your business 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 in the business you started.
On the downside, your children may not actually want the business and may feel pressured to take on something for which they have no real interest (or sometimes even aptitude). What’s more, selling to your kids typically involves a gradual payout, most times 7-10 years, meaning you lose out if business performance declines. That can be a sticky, sorrowful thing, capable of driving a wedge between you and the people you care about most.
5. Sell to your management team. Selling to key managers comes with many of the same 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 someone you trust. Here too, the risks are the same. These buyers often require extended seller financing agreements, meaning you may have to wait seven to 10 years to receive full value. It’s risky move because if business performance declines, you might not get paid.
Then again, we could do a partial sale to your management team, with backing from private equity. Your team gets meaningful equity which will change their lives going forward, but you also get the majority of cash at close.
6. Selling to employees via ESOP. This is a similar exit strategy to the one above, except an ESOP sale comes with some positive tax benefits but also some more stringent rules.
7. Sell a division of your business. Maybe you’re not ready to retire but you want to diversify your investments and alleviate some of the pressures of ownership. Selling off a product line or division can be a good way to achieve these goals without exiting your business completely and maintaining 100% control of your company after the sale.
8. Close your doors. For some business owners, liquidation makes the most sense. By selling off your assets, you can eliminate debt and put a cash reserve in the bank. Unfortunately, many salable businesses shut down and sell their assets at far less value than they could have gotten for a going operation. Before you call it quits, talk to an investment banker or advisor who has a solid closing ratio and a proven track record for getting deals done.
9. Death or disability. No one likes to think about all the what-if scenarios in life. Most business owners have no plan for exiting their business at all, much less exiting in the face of conflict or tragedy. Talk to your advisors and have a written plan for your business in the event you’re incapacitated.
So before you hop on that bus, Gus, we need to discuss much. Think about how you might want to exit your business someday, then talk to an advisor about how to make that happen.