If You’re Exiting Your Business, Selling to One of These Types of Buyers May be the Best Decision You Make

The following is adapted from The Exit-Strategy Playbook .

The majority of purchase deals done today are with either strategic or financial buyers. They are often the best fit for entrepreneurs who want to sell their business for maximum value. Both of them offer unique benefits to sellers, who frequently focus exclusively on one or the other type.

However, strategic buyers and financial buyers certainly aren’t the only categories out there. There are many types of alternative buyers, and as a seller, it’s worth your time to explore them. That’s because, in select circumstances, one of these alternative buyers may be able to create an offer that’s even more attractive than a strategic or financial sale.

After years of buying and selling businesses, I’ve gotten very familiar with the alternative buyer categories. There are benefits to each one, so let’s go through the four most common ones and look at what defines them, what benefits they bring, and when it might make sense to consider selling to them instead of going a more traditional route.

#1: The Owner-Operator

Imagine you are a dentist and have owned your practice for 40 years. You’ve decided you want to retire. A younger dentist can transition in and work with you for a year or two before you transition out. Then they become the owner-operator of your company going forward.

Owner-operator sales are common for small service industries—legal practices, financial planners, dry cleaners, medical practices, plumbers, electricians, landscape companies, and so forth. The typical purchase is an up-front down payment with financing over time as the company continues to bring income to the new owner.

Selling to this type of buyer maintains continuity in the business. The buyer comes in stage left, you exit stage right, but otherwise, things remain pretty much the same.?

In many instances, to help maintain that continuity, the existing owner chooses to offer a consulting agreement to the new owner. That can help smooth out the learning curve and ensure the new owner is able to continue to monetize and grow the business.

#2: A Management-Led Buyout

While owner-operator sales generally involve smaller companies, a larger company may have a management team that decides to do a management-led (or management-leveraged) buyout (MLBO). These are typical when the team is sophisticated and helped grow the business, and they decide to lead the buyout of the company from a retiring founder or owner.

A traditional MLBO makes use of the capital of one or more members of the leadership team to pull together resources and come up with a down payment to buy out the entrepreneur. They then obtain financing for the balance due, similar to a mortgage on a home. That financing could be from a seller-held note, a bank, the Small Business Administration, and so forth.

I see this type of buyout frequently when a business has multiple generations working within the company. The first generation may be nearing retirement age and need some liquidity—thus the need driving the sale—but they don’t mind holding back a note or working with the buyer group to help facilitate their needs. This is a friendly transaction and generally includes a large element of trust between parties.

#3: Initial Public Offerings

Another big exit potential that people hear about is an initial public offering (IPO). IPOs don’t really make sense unless the company has at least $100 to $500 million in revenue (or, in my humble opinion, close to $1 billion in revenue).?

That’s because small public stock offerings are generally thinly traded and have high complexity and expenses due to accounting and compliance constraints. Plus, they are a pain!

Sometimes sellers of companies will do a dual-path exit. Typically, that means they will start the process to go public while simultaneously launching a process with financial and strategic buyers. In essence, they are sailing down two paths, and they decide on the one that yields the best outcome prior to closing.

If you’re in the lower middle market to mainstream middle market, you’re probably below the size required for a successful IPO. While there are hundreds of books on IPOs that you can look into if you’re interested, unless you’re larger than that, I’d suggest steering clear.

#4: Special Purpose Acquisition Companies (SPACs)

Instead of a company going public directly like they would in a traditional IPO, they can create a shell company (a SPAC) that raises capital in the public markets by selling stock and then seeks a company to buy. Because the shell doesn’t do anything, taking it public is an easier and less time-consuming proposition.

For investors, I liken a SPAC to a giant box of Cracker Jacks. Just like you have to eat the Cracker Jacks to get to the prize at the bottom, John Q Public has to invest in a SPAC without knowing what company the SPAC will eventually buy.

It’s not my cup of tea, but lately, it seems everyone wants to play in the SPAC market. In 2020 alone, 219 SPACs were created and raised a combined $73 billion in capital. I mention them here because, while the likelihood of you encountering a SPAC who potentially wants to buy your business is slim, they are becoming more and more common with each passing day.

When Should You Consider an Alternative Buyer?

Although the vast majority of deals I see involve either strategic or financial buyers, the alternative buyers we discussed here can also be viable options. At the end of the day, the exit strategy you choose should be driven by your specific needs.

Owner-operators fill niche needs like medical practices, professional services, and so on. MLBOs seem to fit best when employees or next generations take over for founders planning to retire. And IPOs (and SPACs) seem to fit really big companies.

Remember, in most owner-operated or MLBO exits, you will exit stage left while a new owner enters from stage right. It is fairly common to have a consulting agreement for a period of time to help the buyer be successful. This is common sense for the buyer, and it often serves as an insurance policy for the seller if you are holding back a note or providing seller financing. After all, you want to ensure the buyer succeeds so they can keep paying you!

IPOs and SPACs are a mixed bag. In these scenarios, the seller can stay on in any number of different capacities from full-time employee to CEO to non-employee chair and anywhere in between. With these types of deals, there is typically a mandated lockup period during which large shareholders cannot dump their stock. This helps ensure the public has time to assimilate the company’s transition from private to public before the founder can cash out their chips and ride off into the deep blue horizon.

For more advice on how to find the perfect buyer for your business, you can find The Exit-Strategy Playbook on Amazon.

President and CEO, bestselling author, and acclaimed guest speaker Adam Coffey is known for building high-performance cultures and driving transformative growth. Currently, Coffey leads CoolSys, a commercial refrigeration and HVAC service company. During his four-year tenure, CoolSys has increased revenue by 239% and EBITDA by 376% while growing to more than 3,000 employees. In April 2019, Coffey led the company through a private equity sale from the Audax Group (Boston) to Ares Management (NYSE: ARES). A licensed general contractor, pilot, former GE executive, alumnus of the UCLA Anderson Executive Program, veteran of the US Army, husband, and father of three, Coffey lives in Westlake, Texas.