EXCERPTS FROM THE BOOK SELLING A BUSINESS FOR DUMMIES, WRITTEN BY BARBARA FINDLAY SCHENCK AND JOHN DAVIES, CEO OF SUNBELT
To paraphrase Paul Simon, you have nearly fifty ways to leave your business, and selling comprises seven of them. Your selling options range from the obvious cut-all-the-strings approach by selling your business outright to selling off a portion of your business, ridding yourself of some of your responsibilities while staying involved for some time into the future. Before you slip out the back, Jack, or make a new plan, Stan, it’s worth knowing the lineup of options you can explore in your effort to get yourself free.
#1: Selling your portion to a current partner
Many business owners sell their portion of the business to a current partner, especially in professional practices where partnerships are formed around the idea that, in time, one partner will transition his or her ownership to the other partner or partners. Partnerships should always be launched with buy sell agreements that define the terms of how one partner sells to another. If you’re in a partnership, your sale game plan is set by this buy-sell agreement.
#2: Selling to another business
If you sell your business to another business (or the owner of another business) that’s engaged in the same or a similar line of business as yours (though usually in a different market), that buyer is known as a strategic buyer. Strategic buyers seek to expand the capabilities, breadth, profitability, and competitiveness of their existing businesses by acquiring the strengths of a business such as yours. They aren’t looking to buy your business for its ability to fund a good owner salary or to build up equity for a possible future sale (that’s more like a buyer with financial objectives, which is the topic of the next section). They’re looking to blend or integrate your business into their own.
The way in which strategic buyers calculate what they’ll pay for your business is different from the methods used by buyers with financial objectives. The businesses owned by the majority of strategic buyers fit some, if not most, of the following characteristics:
- A business that’s larger and financially stronger than yours
- A business with long-range plans that would benefit from the strengths of your business – strengths the business would otherwise have to develop on its own
- A business that bases its purchase price on an estimation of how much value your business will add to the buyer’s existing business over the next few years
- A business that will purchase your business only if it determines that the purchase price is less than the cost of creating the advantages of your business from scratch
- A business that’s able to pay cash or obtain financing to purchase your business
#3: Selling to an individual with financial objectives
If you want to lay a bet, bet that if and when your business sells, it will sell to a buyer with financial objectives. What’s more, bet that the buyer lives in or has already decided to move to your home area.
The vast majority of small business sales are to financially motivated individuals who participate in what the business sale industry calls intramarket transactions, which is another way of saying that all the players – the buyer, seller, and broker, if one’s involved – are in the same market area. The typical small business buyer is motivated by some (if not all) of the following benefits:
- A business purchase allows the buyer to be in business from Day One. Instead of going through all the steps of starting up a business, the buyer of an established business essentially steps onto a moving train. A business that’s already established has cash flow that can pay bills from the get-go. Plus, by buying a healthy enterprise, the buyer acquires an established job that can quickly fund a respectable lifestyle.
- Buying a business is less risky than starting one. Most business buyers have never owned a business before, so the fact that established businesses have a lower failure rate than business start-ups has strong appeal. Many buyers have quit or retired early from corporate careers but aren’t yet ready to leave the business world. By purchasing a business they can experience ownership without the turmoil of the start-up process.
- It’s easier to borrow funds to buy a business than to start one. A healthy business has established products, customers, suppliers, and employees; a proven reputation; and most important to lenders – existing sales, profits, and cash flow. While the cost of acquiring a business, especially a healthy one, is almost always higher than the cost of starting a similar business, financing is more accessible because the risk is lower and the immediate income potential is higher. In nearly all business purchases, the buyer combines personal funds with some degree of financing – obtained either from the seller of the business, a bank, or in the form of a Small Business Administration (SBA) loan – to make the deal possible
- Buying a business delivers a three-pronged return on the investment. When purchasing your business, the buyer is motivated by the fact that business ownership delivers more money, even after paying all expenses, than most people can make working for someone else. What’s more, most buyers only consider purchases that deliver a good return on the purchase price investment. Here’s what your buyer will likely want out of the deal:
- A good income
- A decent to downright good return on the purchase price investment
- A future payoff when the business is developed into a great success that can be sold to a new round of owners
Smart buyers (the kind you’re looking for if you want your business to succeed in the future, and especially if you finance any part of the deal) only invest in businesses with strong sales, good earnings, a unique and valued product or service, a healthy marketplace, proven operations, and customers who are likely to migrate with the business under new ownership.
#4: Transitioning to next-generation family
One out of three small businesses transfer to next-generation family instead of being sold to outsiders. That’s why you see so many businesses with names like Smith and Sons. But sons don’t usually take over a business; instead, one son or daughter emerges as the controlling heir.
This book focuses on business sales rather than family transitions. If you plan to transfer your business within your family, seek legal and accounting advice on how to deal with the following issues:
- If you have more than one able and interested heir, determine which will assume control of your business before the transfer begins (don’t leave the decision to your kids – that’s a formula for a family feud). You need to develop a succession plan, groom your successor, and determine how to transfer ownership and receive compensation. Will you give or sell the business to this family member? And how will you personally reap value from the deal?
- Determine how the heir who takes over your business can begin to buy you out even before he or she is financially able to do so independently.
- Develop a means for transferring some of your business’s value to your other heirs so they receive a portion of your wealth even though they don’t receive business ownership or a leadership role. One way to do this is to assess your business’s value at the time of its transfer to the controlling heir. That way you can allocate a portion of the value you created to other heirs (either at the time of business transfer or through estate planning) while allowing your controlling heir to benefit person ally from the additional value that he or she generates after the business transfer.
Selling but staying involved
Not every owner who wants to sell also wants out of the business – at least, not right away. Many still want the sense of involvement, the security of an ongoing paycheck and benefits, and a role in the business world. In this section you find out how you can sell but stay involved in your business.
#5: Selling part to a key employee
This approach relies on the fact that you’ve found an employee who has a desire to take over your business and an entrepreneurial spirit and expertise that matches or exceeds your own. What’s more, the person should be one you admire, trust, and are willing to invest in, because in most cases the chosen employee won’t be in a financial position to purchase all or part of your business, and you’ll essentially make the person your partner until the handoff is complete.
After you identify the right person, you can begin to share ownership by selling him or her a portion of your business for cash or by transferring a share of your business in lieu of salary increases or cash bonuses with the agreement that this key employee will be your successor at some point in the future and will then fully buy you out of your business.
This approach isn’t one to take lightly or without legal advice. You need to hammer out all the details, including what to do if the employee quits, dies, or is fired; what to do if you have serious disagreements; and what to do if, in the future, you want to sell your shares in the business to someone else.
One other word of warning: If you have family members with aspirations to take over your business, be upfront about your sale plans. Perhaps your desired timeline necessitates a sale to an employee rather than to a family member who may not be ready to assume the responsibility. Or perhaps an outside-the-family sale to a proven manager will result in a surer business transition and therefore greater, sale proceeds to you. Whatever your reasons, know them and explain them to the affected family members, especially if the family member works in your business.
#6: Selling part to another business
You may choose to sell a portion of your business to another business for one of these reasons:
- Your business would benefit from a strategic partnership with a key business partner who could lend financial, operational, distribution, production, or marketing strength to your business
- You’re beginning a succession plan that will sell your business gradually to another business in a transition that avoids the disruption of an immediate business takeover
Taking on a co-owner or partner
Under this scenario, you value your business, determine what percentage you want to sell (and your new partner wants to buy), draw up a legally binding partnership agreement, and begin to work as one of the partners in your business rather than as the sole owner. The essential component in your partnership is a buy-sell agreement – a statement of the terms you’ll follow if one partner buys the other out.
Do not – I repeat, do not – enter a partnership without a buy-sell agreement prepared by an attorney. When meeting with your attorney, also discuss how to protect yourself in the event of your partner’s death or disability. Most partnership agreements are accompanied by life and disability insurance policies for this purpose.
#7: Selling to employees through an Employee Stock Ownership Plan (ESOP)
An ESOP is a tax-qualified, defined-contribution employee benefit plan through which employees accumulate shares of the business. Through an ESOP, an owner can sell stock quickly or over years, and the stock sale proceeds may be tax-free. An ESOP provides tax advantages if you’re planning to sell to a key employee or a group of employees.
Before considering an ESOP, decide whether:
- You’re willing to invest the time and effort required to set up a plan
- You’re willing to remain involved with your business over the significant transition period – usually years – between your sole ownership and assumption of ownership by one or more employees
- You have employees with the ability to take over your business, both from a managerial and a financial standpoint
If you decide an ESOP is a good route for your business, be aware that you’re venturing way out of do-it-yourself territory.
Summary comments from Sam Baird:
As a business owner you have many ways to exit your business and get yourself free. But you need a plan, Stan. Sunbelt recommends you start with our complimentary value range analysis. All seven options require that you understand the most probable sale price of your business. It’s also important you understand what you will ultimately net after paying off any company debt, paying taxes and paying closing costs.
The good news is Sunbelt can help you with both internal buyers (employees, managers, partners) and external buyers (financial and strategic buyers).
Here’s the Paul Simon masterpiece for your listening pleasure: https://youtu.be/ABXtWqmArUU
Sunbelt focuses on selling main street businesses (typically under 10 million in revenue). Sunbelt Business Advisors of Las Vegas also focuses on the lower middle market transactions (typically 10 – 150 million in revenue).