If you want to get the best price, terms, and structure when you sell your business, it is critical that you know who the potential buyers are and what they are looking for. This information will allow you make strategic decisions and position your company to increase its value in the eyes of prospective buyers.
In that light, let’s discuss some of the types of buyers you might encounter when you decide to sell all or part of your company. We can first divide the buyer universe into Insiders and Outsiders. It will depend on your goals for yourself and your business as to which group you will want to sell your business to. Insiders include family members and employees. In order to transition your business to family in the most tax efficient manner, your goal will be to minimize enterprise value and obtain the lowest defensible (should the IRS choose to question it) valuation.
A method for selling the business to employees that is gaining popularity is the ESOP (Employee Stock Ownership Plan). ESOPs can be a great way for you to transition ownership to your employees in an extremely tax-efficient manner. They are not for all companies, however, and I would highly recommend that you enlist professional help in evaluating their viability for your company and setting up the plan. Compliance costs can be high, so your company should be large enough for these costs to make sense (payroll should be at least $1 million annually). Also, if you the owner want to walk away with cash, the company will need to borrow money to fund the ESOP – so there has to be collateral and cash flow available for the loan to happen. A great source for information about ESOPs is the website of The National Center for Employee Ownership: www.nceo.org.
Insider sales are generally motivated by reasons other than financial but they often fall apart because of financial realities. Keep in mind that insiders usually don’t have a lot of cash, so you will likely still need to depend on the business for your retirement income after the sale. In Part 2 we’ll discuss the buyer types – Outsiders – who usually bring the most cash to the closing table.
Tom Gledhill has over 35 years founding, building, buying and selling companies. He is a partner in Delta Capital Group, a Business Sales and Acquisition firm specializing in the preparation and sales of companies in the lower middle market with revenues of $1 Million to $20 Million.
For more information on preparing and selling your company please visit: http://deltacapitalgroup.com