In our previous article, Growth By Acquisition: How to Execute Your M&A Strategy, we looked at how companies can grow by merging with or acquiring another business. This month, we’re going to look at the other side of the equation: selling your business.
Why Owners Look to Sell
There are many different reasons why you might be looking to sell your business. One of the most common reasons owners look to sell is that they are ready to retire. Maybe you have worked most of your life building the business so you’d have something you can cash in to provide a comfortable retirement income.
Or maybe you’re just ready for a well-deserved break after bearing the stress and strain (not to mention the 70 and 80 hour workweeks) of running the business for so many years. Perhaps you want to do something different — maybe even start a different type of business. Or maybe it’s time for a leader with different skills to run the company — someone who has the experience and knowledge necessary to take the business to the next level.
Determining specifically why you want to sell is important because this will be one factor that helps dictate how you go about selling, and the type of buyer you might want to sell to. For example, if preserving your legacy, minimizing disruptions and keeping the business in the family is important, you’ll likely want to sell to your children or other heirs, maybe even at a below-market price. But if maximizing the sale price in order to boost your retirement income is important, you might be more apt to sell to a complimentary, strategic or financial buyer.
Five Types of Buyers
There are several different types of business buyers that might be interested in purchasing your company. As noted above, the type of buyer you pursue will depend primarily on your goals for selling the business. The five main types of business buyers are as follows:
- Strategic buyer - The strategic buyer is looking for companies that will give them an additional strategic advantage. Strategic buyers are usually competitors that can enhance the product and service offerings of the companies they acquire in some way. For example, they might be able to increase production efficiency and thus boost profitability, improve distribution networks, or improve the quality in order to justify a higher sales price.
- Complementary buyer - The complementary buyer operates in an industry that offers products and services that complement or enhance yours. Complementary buyers are especially looking for synergies between their companies and the companies they buy that will open up new doors of opportunity for the new merged business.
- Private equity (PE) firm - A private equity firm — also sometimes referred to as a financial buyer — is really more of an investor than a business owner or entrepreneur. PE firms buy companies with the intention of earning a high return on their investment by growing the business and then selling it at a profit within a few years. Note that PE firms are not the same thing as venture capitalists, which usually focus more on early-stage startup businesses. In contrast, PE firms usually prefer to invest in more established and less risky businesses.
- Family members - Family members are usually the owner’s children or other heirs who will represent the next generation of owners. Selling your business to family members brings about a unique set of challenges, such as which children or heirs will have the opportunity to own shares in the business, how the sale will be financed, who will assume day-to-day management responsibility of the business after the sale, and whether the business will be sold at its current fair market value or at a “family discount.”
- Internal employees - Internal employees are the current company employees and/or management team. An internal sale to employees and management is usually accomplished via anEmployee Stock Ownership Plan (ESOP) or a Management Buyout (MBO). One of the biggest benefits of such a sale is the continuity that it helps ensure for your employees and customers, not to mention the fact that it rewards your managers and staff for their loyalty to your company.
Assembling Your M&A Team
Once you have determined why you want to sell your business and what type of buyer will be most appropriate given your goals, your next step is to assemble a team of M&A experts who will guide you through the sale process. In most instances, this team is led by a business broker. His or her primary role is to serve as the market maker by helping you set the right price for your business, find good prospective buyers, market your company to these prospects, and then close the sale.
Your team's overall objective should be to help you determine your goals and create the right plan to achieve them. Joining the business broker, most advisory teams are comprised of a CPA, an attorney with business and estate planning experience, a financial planner, a banker, an insurance agent and a certified business appraiser. Working together, they can help you formulate a plan that successfully addresses the key issues of tax and retirement planning, business ownership, and management.
|City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.|