Many business owners have preconceived notions about who will buy their business or whether it’s even salable at all. A lot of owners think their most likely buyer option is the competitor down the street. Maybe that was true, once upon a time. But the M&A world has changed dramatically-and continues to evolve.
Today, there are several options. It is also not an all or nothing scenario – you can sell all of the business or a large (majority) or small (minority) or some part of it. You can sell it all but remain as an employee or a consultant. You can sell to a private equity firm and to your children at the same time. There are so many options.
Your local competitors are usually not the only buyers at the table. According to the Market Pulse Report sponsored by IBBA and the M&A Source, if your business is valued around $2 million, there’s a 30% chance your buyer will come from more than 100 miles away. And if you have a $5 million business, there is about a 75% likelihood that your buyer will come from outside that radius.
What are some of the other exit options available in today’s market? Here’s an overview of seven common exit strategies, with pros and cons of each:
Sell 100% of Business, 3rd Party Sale.
- Pro: You can typically sell for a higher value in a competitive auction-like environment. You are able to move on to your next chapter without any business responsibilities hanging over your head after you transition out post-sale.
- Con: It can be emotionally challenging to let go of something you’ve invested so much of your life in…if you are not prepared, personally & professionally.
Sell Majority of Business/Recap. Some owners sell but retain an equity stake in the business.
- Pro: Allows you to take some chips off the table, get a cash infusion, and diversify your assets. By keeping a share of the business, you get an opportunity to stay involved and help a new owner grow. Later, you could gain even higher returns when the business sells again.
- Con: You most likely will not being the chief decision-maker. If this is a critical part of your identity, identify other opportunities to use your skills and begin preparing yourself sooner, rather than later.
Sell to Children/Family Members.
- Pro: A business transfer to children or other family members is a great way to ensure your 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.
- Con: Your children may not want the business and may feel pressured to take on something that they have no real interest in. Selling to your kids typically involves a gradual payout, oftentimes over 7-10 years, meaning tension and loss if business performance declines.
- Pro: Selling to leadership has similar 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 people you trust.
- Con: The risks are similar to selling to your family. Your management team may struggle to raise enough funds. These deals often require a high level of seller financing, meaning you could be deferring your total compensation for 7-10 years. Again, if business performance declines, you might not get paid.
Divestiture. Selling off a product line or division can diversify your investments and alleviate some of the pressures of ownership.
- Pro: You maintain strategic focus on your core business.
- Con: You may have to make talent adjustments if employees are working in multiple business units. Plus, your remaining business will have to absorb fixed costs that were previously shared.
- Pro: By selling off your assets, you can eliminate debt and put a cash reserve in the bank. This is the simplest option and can be executed immediately, without waiting.
- Con: Liquidating your assets may generate far less value than you could have received for an ongoing operation. This option also results losses of both jobs and legacy and residual impacts on the community.
Death or Disability.
- Pro: Nothing
- Con: Leaves your grieving family with significant burdens and responsibilities. Oftentimes, there is a significant decline in value before the business is sold.
Advance planning can make or break a business transition. Begin thinking about what you want and how you wish to exit your business someday. Begin talking with an advisor about how to make that happen. An M&A advisor can provide an accurate business valuation, show you how to increase that value, and help you shape a strategy that best fits your overall goals.