For many business owners, there comes an appropriate time to step away and hand over operations to a new owner. If you decide that selling your business is the right exit strategy, you may find yourself with a variety of different buyer options – and then it’s decision time. Should you sell to someone within your family? How about a private equity firm? How do you choose?
This, of course, can be stressful, especially if there is pressure to keep the company within your family. While the selling process differs with every company, the types of buyers present usually remain consistent, and there are pros and cons to each option.
Transitioning to Family
While this is a specific type of sell-out deal that may not apply to every company, it remains a very important option for those owners who are facing pressure to sell within the family. There are a couple of things to consider when deciding to go through with a sale of this nature:
– Family business sales allow for special financing – if the successor lacks the financial resources to participate in a lump-sum cash transaction, financing can be structured so that you, as the owner, receive a stream of income in exchange for your business.
– Buy-sell agreement & gifting program– A buy-sell agreement will allow you to arrange the terms of a business sale now for a deal that will occur in the future. You can also partake in a gifting program, in which the seller gradually gifts portions of the company to the family member. This has the potential to reduce estate taxes, as well as allow your successor to ease into ownership.
– Special tax scrutiny – While you may want to strike a good deal with your family member, the IRS closely examines such business transactions to make sure that the sale reflects fair market value. This is important to keep in mind.
Private Equity Groups
When faced with un-invested capital, private equity groups (PEGs) actively pursue new investments. Business owners are attracted to these strategic buyers if they wish to get substantial liquidity, while also remaining in operational control. You should familiarize yourself with the following before you decide to sell to a private equity firm:
– PEGs acquire companies as either new platforms or add-ons to current investments – a PEG that is adding the business to one of its current portfolio companies will have a different strategy than one that is acquiring the business as a new investment.
– Capital structure – Leverage may be placed on your business to enhance returns and provide access to capital for further growth. In order to keep the business moving forward, the PEG may require the business owner to retain minority equity.
– Private equity vs. seller expectations – While selling to a family member may ensure an unchanged business model, PEGs may have other plans in mind such as eliminating existing ownership and consolidating facilities.
Management Buyout
As we discussed in our last blog, management buyouts are another common exit strategy for business owners. Rather than allowing your company to be acquired by an outside investor or company, an MBO will give ownership to the company’s own management team. During a management buyout, some owners will intend to sell 100% of the company, while others will retain a residual interest.
While there are many options for business owners who want to sell their company, the best choice is dependent on the current condition and potential growth of your business, as well as the owner’s intentions of staying involved with the company.
If you are having trouble deciding who to sell your business to, Symmetrical can help. Our team works closely with middle market private equity firms and family offices who are seeking highly qualified investment and buyout opportunities. Contact us to further discuss your selling options!
Management buyouts have become a common exit strategy when selling a business, and there are two sides to the transaction. On one side, there is the owner looking to sell part or all of its company. On the other side, there is the buyer – an employee of the company being sold.
While an MBO, is in fact, an acquisition, it does not involve an outside group. Rather than being acquired by another company or outside investor, in an MBO, the business is acquired by its own management team. During a management buyout, some owners intend to sell 100% of the company, while others wish to retain a residual interest.
So why should you consider management buyouts? Well, they are actually a positive indicator for most companies, maintaining company culture and growth opportunity and shortening the lengthy due diligence process of selling to an outside investor. Ultimately an MBO shows that employees value the work of the company and believe in its future.
You may want to consider a management buyout if the following factors are present within your company.
Strong Management
Since a company’s management team is often the most knowledgeable about the business, a transfer to those individuals usually proceeds without major drawbacks. These new, yet familiar owners understand the culture and values of the company, which will also help in reassuring other employees who may be hesitant about the buyout.
A Culture of Confidentiality
If keeping internal processes and responsibilities confidential is important for the success of your company, the most trusted individuals to hand it off to would be those who already know the insider information. Rather than risking the core foundation of the company by selling to an outside investor, you can find comfort in knowing that the new owners respect the confidentiality of the business as much as you do.
Foreseeable Growth
If the company is positioned for growth and operates within a stable industry, it is better for those who understand the business to continue driving it forward. Outside investors may attempt to change the path of the company and take risks that alienate current employees and customers.
Financial Understanding
An MBO can have substantial financial payoffs if, as the business owner, you have realistic expectations about the value of your company and are willing to work with both the management team and the financial investors. The business owner and management team should consider three things with a private equity partner:
- Their financial resources
- How they align with your company’s interests
- The value-added services they can provide
Management buyouts are a viable exit strategy alternative for business owners. If you’re ready to sell, consider your options and contact Symmetrical to learn if a management buyout is right for you and your team.
Growing up we were constantly reminded of the importance of being organized and prepared and making sure that our responsibilities were being fulfilled. These two concepts have followed us now into our daily tasks both at home and in the workplace, but how well do we abide by them?
These attributes are important for any business owner, especially when a transfer of ownership is approaching. Making sure you have all of the necessary documents, including accounting, legal, and insurance paperwork will allow you to not only save time, but also increase your business’s valuation upon transfer.
Below we have listed some tips on how to ease the transfer process and get the most out of your business:
Identify proper documentation
Before you can organize anything, you must first know what it is that you will need for the transfer. Ask your M&A Intermediary a detailed Due Diligence List, so that you don’t waste time and energy gathering items that won’t add value in the long run.
Streamline your documents
Once you identify the necessary documentation, you need to organize your documents and systems. This means keeping financial records up-to-date (audited statements are ideal but if you are not going to go to that level, at least provide hard monthly closes), gathering contracts and revisiting corporate documents. Try to keep all of this information digital so that it can be easily shared. Building a Virtual Deal Room is ideal.
Create an advisory council
Professionals who know your business inside and out will be the most helpful when it comes time to transfer your company. Consider setting up a strong management team or advisory council to stay on top of transaction requirements. This will allow you to stay on track with your daily tasks, while still looking out for your business’s future.
It is no wonder that business value increases when owners have all of their documents aggregated, including easy access to accounting, legal, insurance, and other information necessary for a transaction. Make sure that you are prepared and organized in order to get the most out of your business. Bottom line is that ease of transferability equates to increased valuation.
Our team has significant experience helping business owners prepare for and complete transactions, including mergers, acquisitions, and management buyouts. Contact us to learn more.