5 alternatives to relying on luck to sell your business
As a business owner, you can take the luck out of selling your company by planning ahead. It can take two to three years to prepare your business to be attractive to the market. Here’s why you should get started today.
In 2012, two brothers began discussing the sale of their business with a key employee. He was young, but claimed to have an equity backer. After a year of negotiations, he admitted that he had no cash and that his equity backer (if real) had withdrawn. The young employee left the company six months later – perhaps looking for another opportunity to buy.
In their 70s and running out of energy, where were the brothers to turn? They sought advice and soon discovered they were relying on finding (and closing) a needle in a haystack.
They had not planned ahead to create attractive options for themselves as owners of an investment. Their business had always been steady, and they never really tried to grow it. They didn’t reinvest the annual cash flow that their business generated. It became apparent that the lack of growth hurt the market value of their business.
Premium valuations are paid for businesses with a record of, and expectation of, growing cash flows. Finding a buyer on their own to pay an acceptable price and retain all (or even many) of the employees was improbable.
To structure a deal with key employees is a fine idea – one that typically allows the company to continue in operation. However, they can be hard to find. Many key employees don’t have the personal equity capital required to buy a business. Most often, they barely have enough to make a serious dent on a down payment. Sweat equity doesn’t fund an owner’s retirement. 100 percent seller financing is usually a last resort before liquidation.
Here are five alternatives to relying on luck-based planning to sell your business:
- 1. Get valuation and market input to understand where you stand and what your reasonable options are.
- 2. Negotiate with the “equity backer” directly and not just the key employee. Does the backer have the capacity to close a transaction? If not, then save your breath (and your confidential information). Finding multiple interested parties creates competition that will improve price and structure.
- 3. If the employees are an option, find out if they are truly prepared to be owners and to take on responsibility and liability. If so, agree upon a price and a date to become effective. They’ll have to build up a fund for a down payment (i.e. through salary reduction, bonuses tied to achieving growth targets, etc.)
- 4. If the business is large enough, consider an Employee Stock Ownership Plan (ESOP) to purchase 30 percent or more of the stock. There are tax incentives for the seller, and it represents an attractive retirement plan for current and future employees. However, it demands rigorous formality (the Department of Labor is the interested party here) and some substantial costs.
- 5. Prepare the business (and the owners) for the transition. Retain an business broker to take the company to market. For the fees that the business broker may charge, the seller is more likely to end up with a 20+ percent better price and a deal that closes. Remember that growth will attract investors and a premium price.
In the end, these brothers beat the odds. They were introduced to a strategic buyer nearby who bought the assets in a cash deal. Their employees will stay in place. The deal was done quietly, quickly, and without substantial expense. Not everyone is as fortunate as they were.
As a business owner, transition will come, one way or another. Don’t leave your legacy to chance.
