Sell My Business - Insider Secrets to Structure The Deal
Selling a business can be difficult and costly if sell does not understand the options. You have more options than they may realize. Not doing your homework and taking the wrong approach has serious financial consequences for the seller and company, so it pays to know the positive and negative options.
The simplest way to exit a business is probably an outright sale. This approach makes sense when an owner’s family members have no interest in taking it over or when the owner can’t figure out how to take the company to the next level, meet challenges that may have arisen, or just getting burned out.
There are two ways to cash out: An owner can sell the company’s assets outright, or he can sell his stock in the company (or units if it is a limited-liability company). Stock sales tend to benefit the seller, while asset sales are more beneficial to the buyer.
Asset buyers are getting the company’s customers, facilities and physical equipment, as well as intangibles such as goodwill and trademarks, and as a result the buyers are generally protected against prior claims against the business. For example, the previous owners would most likely be responsible if an employee hired on their watch filed some sort of lawsuit plus other types.
Purchasing stock, in contrast, you are buying the company itself and thus are exposed to all of its potential problems. This is why most sales of small, closely-held businesses are structured as asset sales.
Selling the business to its managers is a popular option. An owner might go this route when the company has a trusted, entrepreneurial management team that wants to carry on the business.
The biggest advantage of this strategy is that the owner doesn’t have to spend time trying to find a buyer, then spending the time and work this takes. There is often a tradeoff for an easier sale, the management team may be presented with a lower price. An outside buyer, in most cases, will pay a higher price.
Another option is to sell the company to its employees through an employee stock-ownership plan (ESOP). Setting up these plans are complex undertakings, but have their advantages. For example, there are ways an owner can remain with the company while taking money out of it. And it’s a way to reward employees and provide a long-term incentive for loyalty and hard work.
Here is one way that works: The Company sets up an independent trust (the ESOP) that buys the owner’s stock at a price set by an independent evaluator. The trust holds the stock for the employees for as long as they work for the company. When an employee leaves or retires, he can sell the stock back to the company at fair market value.
Some entrepreneurs don’t like having to let a third party determine the value of the shares, believing that it might mean accepting a lower price than they would get on the open market. Remember the Company has the option of getting a second opinion, sometimes entrepreneurs do not think rational about their business and make it personal. Also, the company has to have cash on hand to buy back employee shares when workers leave. This can divert cash from other business uses and can be a real drain if several employees leave in close succession.
Owners who want to sell their stake gradually, or who want to take some money out of the business without giving up control, can recapitalize the business, or change its financial structure using instruments such as stock, preferred stock or debt. If this type of buyer cannot be found and the business has healthy cash flow, the company might take on debt to buy all or a portion of the owner’s stake.
There are many options for business owners who want to sell, the best way depends on the situation and health of the business and the owner’s desire or need to stay with the company or move on. Understanding all of the options, and getting good advice from experienced business professionals, can make it easier to pursue the best route that fits your needs.