6 Ways to Sell a Business for Maximum Return — Download Your FREE Business Succession Template PDF
Guest Author: Steve Goodman, CPA, MBA of SHGPlanning.com
[For over 30 years, Steve has provided insightful solutions to the challenges of business succession planning. Check out shgplanning.com for more information]
You worked hard to build a thriving business. You worked long hours. You implemented best practices. You built a strong team of employees. But the time has come to start thinking about your exit.
Maybe you are looking to build a new business. Maybe you are looking to retire. No matter what your reasons, we want to help you maximize your return on the years of hard work you put into building your business.
While there is a lot of helpful information available on starting and running a business, many business owners become frustrated at the lack of information about selling a business for maximum return. Some end up just locking the doors and moving on, leaving hundreds of thousands or even millions of dollars of equity behind.
What’s worse, many business owners have ready, willing, and able buyers right under their noses. Most business owners do. Many business owners have multiple options.
Business owners who maximize their return learn their options and prepare their businesses to sell and get the right help to find buyers and close a sale. Many invest in a coach who knows how to help people make businesses more profitable and attractive to buyers. They also work with a business broker or merger and acquisition advisor who know how to find the right buyers and close transactions. They know they may have hundreds of thousands or even millions of dollars at stake. To set themselves up for success, they get help from experienced and resourceful professionals.
The First Step to Selling Your Business
The first step to selling any business, however, is to know your options. But while there is a lot of information about starting, running, and growing a business, there is a lack of good information about how to sell a business for top dollar, and fast. Not anymore. Here are the six most common options for selling almost any business.
Since we started helping business owners maximize the value of the equity they built up in their business, we find the vast majority of business owners can use one of these six strategies to exit a business in virtually any industry.
- Sell your business to a competitor, supplier, or customer.
- Sell your business to a private equity firm.
- Sell your business to your partners or company management team.
- Sell your business to an independent business buyer.
- Sell (or gift) your business to your children.
- Sell your business to your employees.
Click each exit strategy to learn the pros, cons, and what to do to prepare for each situation.
Also, don’t forget to download your free Business Succession Template PDF to start preparing your exit. The Business Succession Template will help you walk through important considerations, such as whether you are the sole owner, have children in the business, or need to protect children or other key employees from changes in ownership.
If you prefer to have someone walk alongside you as you prepare your exit plan, a good business coach like Jaime can work closely with an experienced and resourceful merger and acquisition advisor or business broker to find the right exit strategy for you, locate the best buyer for your exit strategy, and help you maximize your return.
1. Sell your business to a competitor, supplier, or customer.
Competitors, suppliers, and even customers are strategic buyers. They buy companies to reduce or eliminate competition, enter new markets, add product lines or services, or streamline expenses. They gain economies of scale, guaranteed sales increases, or guaranteed supply.
Competitors benefit in three ways when they buy competitive companies. They grow quicker, eliminate competition, and streamline operations by eliminating your salary and other business operations divisions like HR, Legal, and Marketing, which they already have in place.
Suppliers and customers benefit in similar ways. Suppliers increase profits by adding direct-to-customer sales channels for the products they normally sell to you wholesale.
Customers increase profits by getting your products or services at cost. This gives them a significant advantage over their competitors in the market because their competitors will not be able to compete with them on price.
Pros of Selling Your Business to a Competitor, Supplier, or Customer
- You will earn yourself the most money. Your company is worth more to them than anyone else.
- Your sale will close fast. Competitors, suppliers, and customers either pay cash or have access to their own financing to buy your company. You will have the vast majority of your sales price in your account the day the transaction closes. Only a small percentage is generally held in escrow, and generally only when part of the purchase price is contingent on future events.
- You do not have to train them. Competitors, suppliers, and customers know your business well. They know how to run businesses like yours so your continued involvement generally only lasts for a limited transition period.
Cons of Selling Your Business to a Competitor, Supplier, or Customer
- Some of your employees will be laid off. Eliminating unneeded positions is one of the biggest benefits to a competitor transaction. In real terms, that means people you care about will need to find new jobs. They might also shutter unprofitable divisions that do not offer the same strategic benefits of your core business.
- If you have children in your business, especially in management positions, there is a significant risk that they could be laid off. Be sure to discuss this with your attorneys so they can work to minimize or eliminate this risk during negotiations.
- Your company will get a new identity. Acquiring companies often only keep the branding of the company they acquired for a short while. Eventually, your legacy will be part of their legacy.
What to Do Before Selling Your Business to a Competitor, Supplier, or Customer
With any exit strategy, confidentiality is critical. It is even more critical when selling to a competitor, supplier, or customer. A loose-lipped competitor could quickly spread news that you are looking to sell in an attempt to lure your customers to do business with them. Suppliers or customers could start planting seeds with other industry actors that they are expanding into your space. News can spread fast.
If you have already been approached or are considering looking for a strategic buyer, connect with an experienced business coach, business broker, or merger and acquisition advisor to help you get the right pieces in place to maximize your return and ensure the confidentiality of your discussions.
No matter how well you have prepared your business, you often need to do a few things to maximize your return and ensure a smooth transaction. Most of the time, a little house cleaning is in order, just like you would fix a few things around the house and stage it well to maximize your sale price. Additionally, you would need to prepare a full due diligence presentation to present your business to potential purchasers in the best light.
2. Sell your business to a private equity firm.
While competitors, suppliers, and customers are strategic buyers, private equity firms are financial buyers. They generally buy companies to grow and sell for profit or use them as collateral against which to borrow for immediate cash return. It sounds harsh, but it is true.
Private equity companies know how to run businesses for profit and charge companies in their portfolio a handsome management fee. Private equity firms can turn one company into multiple income streams and significant profits. They are highly motivated to buy companies.
Pros of Selling Your Business to a Private Equity Firm
- Selling to a private equity firm will earn you the second-highest sale price, second only to selling to a competitor, supplier, or customer.
- Money is not a problem for private equity firms. When you agree on a sales price, they will cut you a check you can cash right away.
- Generally, fewer people will be laid off than when selling to competitor, supplier, or customer. Private equity firms have senior management teams, but they need your employees to run your company. They might shutter unprofitable departments with low potential, but your business generally stays intact.
- You could earn a significant consulting fee to train a new primary operator. They know you are the expert.
Cons of Selling Your Business to a Private Equity Firm
- You will not maximize the sales price. Private equity firms need a deal to fit into a formula that fits into their core business strategy. That will be lower than what a competitor, supplier, or customer might pay.
- Some of your employees will be laid off, especially senior management and people working in unprofitable departments.
- If you stay on to train a new primary operator, you will witness a significant shift in culture and strategy. They will make decisions based on numbers and spreadsheets. They will run the business their way. This is often a tough adjustment.
- While the risk of your children being laid off if they are in management positions, they will experience a significant change of culture and may effectively be driven away. Be sure to discuss this with your attorneys so they can work to minimize or eliminate this risk during negotiations.
- If your business does not meet the buyer’s expectations down the road, they will quickly close the doors or cut it off from additional capital. They are not sentimental. They are in business for the money.
What to Do Before Selling Your Business to a Private Equity Firm
Private equity firms are the most experienced business buyers. They will have a team of professionals supporting them.
If you are considering selling to a private equity firm, it is critical to have experienced professionals supporting you. They will put together the best due diligence presentation to maximize your return with private equity. They will know what house cleaning makes your business more attractive to private equity firms. They will represent you in negotiations to ensure you get the best return on your years of hard work.
3. Sell your business to your partners or management team.
If your partners or management team can fund the transaction, selling your business to partners or your management team can be one of the most satisfying transactions. Partners and management teams tend to be aspirational buyers.
Partners often dream of owning their company outright but need strategic partners when just starting out. Company management team members often dream of having a piece of equity and sharing profits but lack the opportunity or financing to facilitate a transaction on their own.
When structured right, your desire to exit could be an opportunity to help their dream come true while leaving your company in good hands.
Pros of Selling Your Business to Your Partners or Management Team
- Your partners and management team know your company better than anyone else. You trained them. Your company will be in good hands. Their future success will be part of your continued legacy.
- If you cannot find a cash buyer and have to owner-finance a transaction, your partners or management team will be the most qualified (and likely) to pay you back. They know the company well, and you know them well.
- You can skip all the housekeeping to prepare your business for a new buyer. These people know your business from the inside out.
- Layoffs will be minimal. If you have children in the business, they are more likely to retain similar long-term security to what they enjoyed with you running the business.
- Because you found your buyers, you will not need a business broker and can save brokerage fees.
Cons of Selling Your Business to Your Partners or Management Team
- Partners and management generally do not have a pile of cash or access to financing. You will most likely be the bank. You might get some money up front, but most of your money will come in the form of a loan paid out over many years.
- If your partners or management prove unqualified and the company fails, you might never get your money. Best-case scenario in this situation is you having to take over and save the business again.
- You cannot fully distance yourself from the business because you depend on its continued success to get paid in full.
- Your buyers are more emotionally tied to the business. They might made decisions based on emotions that make it less likely for you to be paid in full.
- If you want a down payment before handing over the keys, it could take a long time to close a transaction.
What to Do Before Selling Your Business to Your Partners or Management Team
Selling your business to partners or your management team is useful when your options are limited but not often a first option. Your return will be limited, your payout will occur over time, and the risk of nonpayment is very real.
For those reasons, we highly recommend talking with an experienced merger and acquisition advisor or business broker so you can fully understand your other options and make an informed decision.
4. Sell your business to an independent business buyer.
The market is full of buyers who want to buy a business but do not have one specific business in mind. They are not competitors, suppliers, or customers, so they do not have a strategic purpose behind a transaction. They are not detached investors like private equity firms, so they will not have a strict purchase or operations formula. But they are actively looking to buy a business.
Pros of Selling Your Business to an Independent Business Buyer
- Selling to an independent business buyer will generally get you a higher price than selling to your management team.
- Independent buyers are more likely to have a significant down payment or private financing.
- Independent business buyers are motivated and likely to accept your company’s flaws and be more flexible with negotiations.
Cons of Selling Your Business to an Independent Business Buyer
- Independent business buyers will be the least qualified operators. They might have a business background, but they will have less experience in your industry than competitors, suppliers, clients, partners, your management team, and even your employees. They also will have less access to additional capital than many competitors, suppliers, clients, and private equity firms. There is a real chance you will have to stay on as a consultant or save your company from mismanagement.
- You will need a broker and pay a brokerage fee to find an independent business buyer.
- You are unlikely to be paid in cash.
What to Do Before Selling Your Business to an Independent Business Buyer
Selling to an independent business buyer is often the best option only when no employees, children, partners, strategic buyers, or private equity are interested.
Because you need a business broker to help you find an independent business buyer who can complete a transaction, we highly recommend asking the broker to explore other options simultaneously. We also suggest you connect with a merger and acquisition advisor to ensure the transaction is structured best and closes smoothly.
5. Sell (or gift) your business to your children.
If you have children who want to take over the business, your best transaction might be to sell or even gift it to them.
As simple as it sounds to sell or gift your business to your kids, this type of transaction is extremely complicated. If not structured right, estate and gift taxes can be costly. Add family dynamics to the mix, and the potential for a deal like this to go south is very real.
That said, when structured well, selling or even gifting a business to your children is often a dream for many families. While tax consequences can be costly when not structured well, an experienced tax attorney can structure a deal to provide many tax advantages.
Pros of Selling (or Gifting) Your Business to Your Children
- Your legacy will continue for years to come with new owners you trust.
- Your children will be able to add their own legacy to the foundation you built.
- You help set up your children’s careers for decades to come.
- You do not need to find a buyer. That means no housekeeping and no broker fees.
Cons of Selling (or Gifting) Your Business to Your Children
- Your sale price will not be anywhere near what a third party would offer, but an experienced attorney can help you take advantage of several tax advantages to make even gifting the business to your children still highly profitable.
- Legal fees can add up when structuring the most tax-favored transaction.
- You will get your money over several years. If something happens to the business in the meantime, you may have to go back to work or not get the payments you expect.
- The transaction can get very complicated, especially if only some of your children are involved in the business.
What to Do Before Selling (or Gifting) Your Business to Your Children
The most successful transfers to children happen over a period of years. Founders start talking with their children about their career goals and how the business might fit in. They gauge their children’s interest in taking over the business or if they would rather carve their own path in the world.
Once everybody is on the same page, the family gets the right professionals involved to structure a transaction to be triple-win for their parents, all relevant children, and the company as a whole.
For example, assume your company is worth $5 million and you have two children, Jack and Jill. Jack works in the business, and Jill does not. You are unmarried and want to give each child 50% of your business. If Jack and Jill both want to retain ownership, you could talk with your attorneys about advantages and disadvantages of selling now, gifting now, or waiting until your death for your kids to get ownership.
If Jack wants to continue to work in the business and Jill does not, we highly recommend talking how the business could fit into a larger estate plan. For example, if Jack is active and wants to remain active, you could gift Jack shares of the company and let him and Jill know that Jill will be given something else. This way Jack can move forward with the business and Jill can focus her career where she wants to and receive similar value from you outside of the business. Having these conversations early helps reduce the likelihood that the business will create resentment among your children. Make sure everyone is involved in the conversation. Do not have separate conversations with each child. This ensures everyone is on the same page.
This is just one example of why starting early and talking with everybody involved is important in a family transaction. Some business owners have two or three children in the business and others who are not active in the business. They often choose to give shares to the active children and something else to the non-active children. Talking with all your children about your plans is especially important in these situations.
We highly recommend talking with an experienced business broker or merger and acquisition advisor to understand all your options before finalizing a strategy. You may learn that there is a vibrant third-party market for your business and the best deal for your family—financially and relationally—is to sell your business to a third-party and support your children in other ways.
If you have ever thought of selling or gifting your business to your children someday, we highly recommend you start talking with them about the possibility as soon as possible. Gauge their interest. Who wants to work in the business? Who does not? Who wants to retain ownership in the business? Who does not?
Also, download this FREE Business Succession Template to help you work through these issues and guide you in your conversations.
6. Sell your business to your employees.
Some business owners find selling their business to their employees through a structure called an employee stock ownership plan, or ESOP, their best option. Selling your business to employees through an ESOP generally ends up being the best option in one of two situations.
The first situation is with an owner not looking to maximize his or her financial return and has no children interested in taking over. This owner would rather present all employees with an opportunity to own a piece of the business they work so hard to support.
The second situation is when an owner has built a sustainable business but has no interested third-party, family, management team, or partner interested in taking over. This owner knows the business would be a tough sale and sees a sale to employees as the best way to move on while ensuring the company remains in good hands.
While selling your plan to employees might sound complicated, the truth is it is much simpler than most people expect. In fact, the government-created ESOP structure makes selling your business to employees simple. It is something an experienced attorney can help you structure relatively easily.
While there are several rules and many different ways to structure an ESOP, here is generally how it works.
First, the company forms a special trust, called an ESOP Trust. The company then starts to fund the trust, often using cash from operations.
When the trust has enough money to support a down payment to buy your shares, the transaction moves forward with the down payment and either outside bank financing or owner financing. Shares of the trust are allocated to each employee based on a number of factors, such as relative pay, tenure, or some other relevant factors determined when setting up the ESOP Trust.
When employees leave the company, they must sell their stock back to the company for fair market value.
Pros of Selling Your Business to Your Employees using an ESOP
- You are essentially guaranteed a return on all the equity you built up and do not have to pay any broker fees because you found your buyers. You might want to still engage a merger and acquisition advisor to know all your options before moving forward with an ESOP but would not need a broker to find you a buyer.
- Similar to selling to your management team, your employees will be likely to pay you back if owner financing is necessary. They will continue to run the business as-is and be led by the management team you trained.
- ESOP transactions offer very favorable tax advantages that help you get paid faster than if you sold it to employees through traditional owner financing.
- Studies show ESOP-run businesses are more profitable than non-ESOP businesses. This makes a default on any owner financing even less likely.
- Your legacy will continue in your business for years to come.
Cons of Selling Your Business to Your Employees using an ESOP
- Your sales price will be on the lower side because it must be set at “fair market value.” You cannot charge a premium.
- It could take some time for ESOP transactions to complete. It will not be a quick transaction.
- Departing owners usually need to finance part of the transaction. Thus, while the tax code helps you get paid faster than if you did not use an ESOP Trust, it will take several years to be paid in full.
- Legal fees add up to properly structure an ESOP transaction, although they are generally offset by not needing to pay a broker fee.
What to Do Before Selling Your Business to Your Employees using an ESOP
While selling a business to employees through an ESOP might be an option of last resort for some owners, it is an option nonetheless.
If you are considering selling your business to employees, we highly recommend speaking with a qualified business broker or merger and acquisition advisor to understand all your options.
If the market for your business is not very active and you have no children interested in taking over, a sale to employees through an ESOP could be a triple-win for you, your company, and your employees.
There eventually comes a time when every business owner moves on. The best way to find the right strategy for you, your family, and your business is to start early.
Involve the right people, such as your family, key management personnel, and experienced and creative professionals. Professionals such as a business coach, attorneys, tax advisors, business brokers, and an experienced merger and acquisition advisor can help you make the best decision for your unique situation and then facilitate a transaction that helps you achieve your goals. When you have children, talking with a professional with understands the challenges of business succession planning is a must.
If you ask the right questions and have the right conversations, the best strategy for your unique situation often rises to the top.
If you don’t, it could cost you and your family hundreds of thousands or even millions of dollars. Your business could be forced to close. Your employees and key management personnel could be out of work. Your business legacy could reach an unnecessary end.
About the Author:
Steve Goodman – shgplanning.com
For more than 25 years, SHG Planning has provided insightful solutions to the challenges of business succession and wealth preservation, focusing on the needs of owners of closely held businesses and high net worth individuals.
With a broad-based understanding of the legal, tax and financial issues facing the business owner plus a decade of specialized expertise in business consulting, SHG Planning is able to design and implement plans which are far broader in scope than those available from any other single source.
Hi I’m Jaime. Each and every week I bring you the top business advice from the people who know best.Learn More