It’s not easy to sell a business, but many owners have more options than they realize. The wrong approach to cashing out can have serious consequences. So evaluate the pros and cons of each option.
An outright sale is the simplest exit strategy. This can work well when your family doesn’t want to take over the business, or when you can’t address challenges within the company. You can sell your business’s asserts outright, or initiate a stock sale. Stock sales are often in the seller’s interests, while asset sellers are often best for buyers.
Asset buyers gain access to physical assets, customers, and facilities, as well as intangible assets such as intellectual property. They are also often protected from prior claims made against the business. A lawsuit or environmental enforcement action would likely still be the responsibility of the current owners.
By contrast, stock purchases involve the purchase of the entire company, exposing buyers to all of the company’s problems. Thus most sales of small and closely held businesses are asset sales.
One popular option is to sell the company to its managers, particularly if there is a trusted and entrepreneurial management team willing to take the business on. This strategy saves the owner time that would otherwise be spent trying to recruit a buyer. But the price might be lower than what an outsider would be willing to pay.
You might also sell the business to employees via an employee stock ownership plan (ESOP). These plans are often complex, but they carry many advantages. The owner can sometimes remain a part of the company while profiting from the business. This strategy also rewards the long-term loyalty and work of employees. The company sets up an independent trust to purchase the owner’s stock at a price set by an independent evaluator. The trust retains the stock while the employee works for the company. When he or she leaves, he or she can sell back the stock at fair market price.
Some owners resent allowing a third party to determine the value of shares. They worry this will mean accepting a lower price than they would on the open market. The company must also have cash on hand to repurchase employee shares when they leave. This can rob other business uses of cash, draining assets when several employees leave around the same time.
Owners who wish to gradually sell their stake, or who wish to access some cash without sacrificing control, can recapitalize the business. They might also change its structure with preferred stock, stock, or debt. For instance, if an outside buyer is interested but unprepared to buy, the company might sell preferred stock to this buyer. This offers a cash infusion, while the buyer becomes more familiar with the company.
If there’s no buyer and the business has healthy cash flow, the company taking on debt to buy a portion of the owner’s stake may make sense.
Business owners who want to exit have numerous options. The best strategy depends on the health of the business and the goal of the owner. Understanding each option requires good advice from experienced professionals. This knowledge equips owners to pursue the best possible route for all parties.