7 Paths to a Small Business Sale
Deciding to sell your business is a big decision, but once you've realized you're ready to move on the next step is to choose the sales path that best meets your needs. Some owners want to sell as quickly as possible, others want to receive the highest sales price regardless of timeframe, and still others may wish to remain involved with the business post-sale. Factors such as these combine to form your sales objectives and, before going any further, it is critical that you define these clearly. A broker who has been around the block with a number of other entrepreneurs can help you do this.
With your sales objectives clearly defined, the next step is to evaluate and choose your sales path. Your ability to achieve your sales objectives will be greatly impacted by the sales approach you choose. Some of these impacts are obvious while others are more nuanced and the advice of an experienced business broker may be helpful. To get you started, however, here are the most common sale options and some of the advantages they offer to business sellers. Consider each in light of your sales objectives to select the right path for you:
1. Sell to an Existing Partner
If you have a business partner, a very common sales path is selling your stake to your partner. Most business partnerships begin with a legal agreement outlining the process for selling a partnership stake to the remaining partner(s). When this document exists, the details of the process (often including the price) are already established and the transition should be fairly smooth. One of the key benefits of this sales approach is that, often, pre-defined partner exit strategies result in the least disruption to the business, clients and employees.
2. Sell to Family Member(s)
Selling to a family member is the exit strategy of choice for about a third of all small business owners. These owners have usually been thinking about the transition for some time, so it's likely they have already discussed their exit plans with attorneys, accountants and their family successor(s).
Valuation, business transfer and related estate planning issues can be especially complicated under this approach as you need to simultaneously plan for/secure your future while also leaving the new family owner well positioned for success post-sale. Consequently, a sale to family requires advanced planning and a generous timeframe.
The downside of a family sale is that it rarely results in a top dollar sale. However, a family sale provides flexibility in determining your future involvement with the business and, typically, creates a smooth transition for employees and customers. It also offers the satisfaction of keeping the business in the family and helping the future generation succeed.
3. Sell to a Key Employee
This option is great when a trusted employee has both the desire and financial capacity to buy and run the business. It typically begins with the creation of a partnership and buy-sell agreement.
As with a family sale, selling to a key employee rarely achieves a top-dollar sale price. However, it offers many of the same advantages including flexibility in determining your future involvement, continuity for staff and clients, and the satisfaction of selling to someone who has helped you shape and grow the business.
4. Sell to an Individual in an Arm's Length Transaction
Individuals buy businesses to become an entrepreneur while avoiding the risk of starting a company from scratch. Additionally, thanks to seller financing (which is usually a necessary component of these deals) it is easier for new owners to finance a purchase than it is for them to finance a start-up through investment or commercial financing.
Purchasing an established business offers buyers many benefits including an existing stream of sales and cash flow, established systems, current clients and a reputable brand name. If your business is in strong financial condition and well-positioned for the future, selling to an individual often provides the best opportunity to achieve the greatest range of exit goals.
However, take note that certain sales goals may conflict and you might have to trade one desired outcome for another. For example, if you are unable/unwilling to finance a portion of the sale, you may need to settle for a lower sales price.
5. Sell to a Competitor or Another Business
If you are in a hotly competitive space, being acquired--in full or part--by a competitor may be an option. These types of acquisitions usually occur for strategic reasons rather than purely financial. If the acquirer stands to achieve a substantial competitive advantage from your products or services or through expanded market reach, this sales path offers the possibility of a strong selling price.
An acquisition also typically allows (or in many cases requires) you to take a position with the newly merged company--something that can be a plus or a minus depending on your sales objectives. Acquisition is an attractive option for sellers who want to stay in the industry and are comfortable relinquishing ownership in exchange for a financial payoff and the satisfaction of being part of a larger business with additional capabilities, market reach, competitiveness and profitability.
6. Sell to Employees
A sale to employees involves a tax-qualified, defined employee benefit plan called an Employee Stock Ownership Plan (ESOP). In this sale method, employees of the business buy shares either immediately upon your exit or over a period of time, depending on how the transition is structured.
An ESOP requires significant legal planning and advice and a combination of business factors that are rare in small business--not the least of which is an employee group interested in and capable of owner the business. However, it can be a tax-advantageous sale approach since proceeds may be tax-free. It also allows a phase-out of the owner's involvement, and provides continuity for staff and clients.
7. Liquidate Your Business
Liquidating your business is an option of last resort and is most common for small businesses with significant weaknesses or solvency issues requiring an immediate business exit. In cases such as this, liquidation may be the easiest and fastest way to recover some value while avoiding investing additional funds before leaving the business in your rear view mirror.
If you liquidate, you should consult liquidation sale experts to make sure all proper procedures are followed. This includes selling assets, collecting outstanding receivables, paying off debts, addressing contractual commitments, releasing employees, and finalizing legal and financial obligations to close the business.
Two other approaches for selling a small business are worth mentioning even though they are rare in the small business community: Merging with another business or going public through an Initial Public Offering (IPO). Both of these approaches require significant legal and accounting assistance, so be sure to hire outside expertise early in the process.
While deciding to sell your business is a big decision, deciding how to do it can have a dramatic impact on your ultimate success. As such, be sure to investigate all of the available options. Speak with your family, friends, employees and an experienced business broker to help you crystallize your sales objectives and choose the exit path that will best meet your post-sale goals.