Business Owners: One of the Most Important Decisions You Will Make

Sep 29

Choosing the Exit Lane to Sell Your Business

Overview

How you sell your business impacts your financial future, family, and employees. This article will help you understand your exit options. We refer to this as choosing an exit lane. The lane you select determines how far you will go towards meeting your personal financial goals. Once you commit to an exit lane, it’s challenging to change course, so plan early and choose wisely.

Who Will Buy Your Business?

The first step in selecting your exit strategy is to understand your prospective buyers. Your options to exit range from liquidating your business to selling to a strategic buyer. The most common exit lanes include the following:

Liquidation - Selling your assets and settling your debts may be the quickest exit option, but it will likely yield the least return for you, the seller. Liquidations most commonly apply to bankrupt or poor-performing companies. In almost all cases, it’s better to try and find a buyer who wants to continue operating your company.

Employee Stock Ownership Plan (ESOP) - Selling your company to your employees can be very rewarding to you and your employees. The National Center for Employee Ownership (NCEO) provides detailed resources about this option. Selling your business to an ESOP will yield a fair value, but it may have favorable tax savings that increase your overall return. Selling to an ESOP requires a well-thought-out succession and exit plan. If you choose this option, the NCEO is an excellent place to learn about resources available to help you through the process.

Management Buy-Out (MBO) - Allowing your core management team to purchase a controlling equity position or acquire your business is another option to consider. As listed in Deloitte’s Anatomy of a Management Buyout, the benefits of an MBO include:

Rewarding your management team by allowing them to take over the company
Minimizing the release of confidential information
Transferring ownership to your management team who is well-versed in your company’s operations and culture

Typically, an MBO will not yield as high of a return to the seller as a sale to a strategic buyer, but the benefits may be worth a lower financial return.

Financial buyers are the most common buyer; this type of buyer mainly purchases your business’s expected future income stream. Financial buyers typically buy companies where the expected future cash flow can cover their cost of debt and generate a return on their investment that meets their investment goals. The most common and growing area for this type of buyer is the private equity buyer. A private equity buyer will usually only buy a majority share of the business with a five to seven-year plan to have the original owner sell the remaining shares at a higher value.

Strategic buyers will typically pay the most for your business. This type of buyer will focus on how your business will add to their existing company or allow them to expand into a new market. Cash flow is essential, but depending on the buyer’s plan for your business, it may not be critical.

An example of how selecting a buyer impacts your return is illustrated below:

How Will You Sell?

Once you have identified who your buyer is, the next step is to look at how you will exit.

You may be tempted to be your own broker. Selling your business with no outside help will likely leave money on the table, risk possible legal liabilities and unfavorable tax positions, and add significant stress to the process.

Brokers are an option for small to midsize companies, typically $100K in annual earnings before interest, tax, depreciation, and amortization (EBITDA). They offer advice, guidance, and a listing of the businesses to buy or sell. Brokers are similar to real estate agents in that they will provide advice and guide you through the sale process. Fees for a broker are relatively low compared to other options.

Investment bankers are generally an option to businesses with an EBITDA of $500K or greater, though each investment bank has unique criteria for selecting clients to assist. An investment bank will provide hands-on guidance throughout the exit process. Their fee structure may include an initial retainer due at the beginning of the contract and a “successful sale” fee following the completion of the transaction.

Private equity firms typically buy businesses that fit within their portfolio or meet their strategic goals. PE firms will usually purchase the majority of the business and may expect you to stay on as manager for a limited amount of time. Private equity firms generally look for companies that have an annual EBITDA of $1M or greater, but their criteria vary across firms.

What Go-To-Market Strategy Will You Use?

The last step of choosing your exit lane is selecting your go-to-market strategy. Your go-to-market strategy depends on who you choose to sell your business. Some options your broker or investment banker may use include:

Listing your business for sale will provide a broader range of prospective buyers, but you will also lose control of parts of the selling process. Listing your business can be done through a broker, or you can list it yourself through online platforms.

A controlled auction provides a large pool of potential buyers that may yield a higher sale price, but you have a greater risk of selecting a buyer that does not fit your company culture.

A focused solicitation targets specific buyers or groups of buyers that will meet your value requirement and your succession strategy.

The most limited buyer pool is direct negotiation. This strategy limits you to one potential buyer. Direct negotiation is a good option if you have previously been approached by a qualified buyer that fits your sale requirements.

Summary

Choosing an exit lane that meets your financial and personal goals is one of the most important business decisions you will make. Educating yourself about your options now will give you time to select the best one for you and plan accordingly.

About

Highpoint CFO is a CFO consulting firm based in Tampa, Florida that serves clients throughout the US.

Scott Young is the President and Principal Consultant at Highpoint CFO. He is a CPA, Certified Merger & Acquisition Advisor (CM&AA) and Certified Value Growth Advisor (CVGA) with over 25 years of experience in finance and accounting at industry-leading companies.

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