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Who should I sell my business to? The 4 types of buyers.
Selling your business and exiting the company you've worked to build will require you to ask yourself several challenging questions.
One of the most important questions that will arise as you create an exit plan is who to sell your business to. Can you transfer your business to a family member or existing partners? Or is it best to sell your business to an individual or company looking to buy? The answer to these questions will depend on your financial needs, retirement plan, and the structure of your business.
As you work to determine what's best for you, here are 4 different options for who to sell your business to when the time is right:
Selling to a family member.
Transferring your business ownership to the next generation is an attractive option many business owners consider. Not only does this option allow you to keep the business in the family, but it also allows for a smooth transition of ownership.
Realize that this decision has to be made with care and consideration as you may have active and inactive family members. You will also need to consider what leadership will look like with family members at the helm and what should be done to prepare them for taking the business over someday.
There are several different ways to sell or transition your business ownership to family members:
Gifting. There are significant tax benefits to gifting your business instead of selling it. This is also a beneficial option if you don't require the financial support you would receive from the sales proceeds.
Selling. You can sell your business to a family member for the full amount or offer a note with installment payments made over time. This is a more profitable option and offers financial security through retirement.
Partial-sale. This option allows you to combine gifting with selling. Gifting part of your business offers a smaller purchase amount and thus makes it more affordable for family members to purchase the remaining balance. Additionally, a partial sale allows you, the business owner, a chance to slowly exit the business over time.
Transfer via will or succession planning. Choosing to will your business to family members upon death is also an option.
Keep in mind that all of these options depend on your financial needs and the future goals you have for your business. Be sure to work with an estate planning attorney and tax expert to determine the best way to transition your business ownership to a family member should you decide to go this route.
Selling to a partner or other owners.
If the ownership of your company is either a Partnership or LLC, you'll likely have the option to sell your business to the remaining owners/partners. The first and most crucial step of this process is to follow the guidelines you've already laid out and agreed upon in the buy-sell agreement or partnership agreement.
Here are two ways you can sell your portion of ownership in a company:
Other owners or your partner purchase your share. This can be done in one lump sum, or the buyout can be financed over time.
Sell your share of ownership to a separate third party. This should be done only if the Buy-Sell agreement allows it and if the partners aren't interested or willing to buy out your portion first. Should you choose this option, you will need to find someone with the financial means, experience, and skills to take over your part of the business.
Before selling your portion of ownership in the company, an assessment of value should be completed so all parties understand the total worth of the business.
Selling to current managers or employees.
Another option is to transition ownership to your staff. There are two options for selling your business to your personnel: A management buyout (MBO) or an employee stock ownership plan (ESOP).
Management Buyout
This is a great opportunity if you have leaders with the right skill sets that are ready and willing to take over your business. A couple of pros and cons of this option include:
Less time spent transitioning ownership. Your management team is already well-informed and understands your business's day-to-day operations, reducing the time spent training and delegating tasks.
It can be easier to retain employees when they know that their current managers are taking over rather than an unfamiliar third party.
Required capital for the sale of the business can be challenging for managers to obtain. They will likely need outside funding, making it difficult for you to get the most value from the sale of your business.
Employee Stock Ownership Plans
This option is a form of profit sharing, allowing employees to purchase stock and thus become partial owners of the company. This plan also has both pros and cons:
Purchasing stock in the company can become part of retirement planning for employees.
Employees who own stock in the company are motivated to help the company grow.
An ESOP program can produce tax benefits for employees.
These programs can make it more challenging to sell your last portion of the business to a third party who wants complete control.
Both an ESOP program and an MBO allow the current owner to exit the company slowly and over time. This can be a huge bonus, but remember that because these types of ownership transitions take so much time to implement, you'll need to start them well before you plan to fully exit your business.
Selling to a competitor.
While selling to a competitor isn't without risk, you also have the greatest chance of receiving the highest value since a competitor is in the same field and understands the worth of your business and its growth potential. This route is also beneficial if your primary goal is to sell the business quickly and make a complete exit.
As mentioned, however, this option can be risky. Therefore, sharing pertinent information with a competitor must be done cautiously and strategically. Here are a few key factors to consider to mitigate risk as much as possible:
Work with a business broker to ensure confidentiality throughout the sale process.
Implement a clear and concise Non-Disclosure Agreement that protects you from confidentiality breaches.
Release information about your business slowly and gradually, giving you time to get to know and trust your prospective buyer.
Be sure to work closely with an attorney and business broker throughout the due diligence process of selling your business to a competitor.
Need help getting started?
While crafting an exit plan and selling your business can be lengthy and challenging, you have choices when deciding who to sell your business to. To review your options and start exit planning, contact us today for a free consultation.