Only a small subset of business owners start a venture with the end in mind. For most of us, we start a business, grind it out for years (or decades), and wake up one day asking ourselves “What am I going to do with this thing?”
There may be more options out there than you realize, and preparing in advance can go a long way toward achieving the most desirable outcome.
In speaking with thousands of business owners over the past 15-plus years of my career in mergers and acquisitions, it seems that many people believe their exit strategy is limited to two options — either shutting down their operation or selling to a local competitor and walking off into the sunset.
While many business transitions/dispositions do end this way, there are a variety of other options that may be more aligned with the needs of a business and its owner’s personal succession goals.
Keeping It In-House
Perhaps you have a management team in place or family members who are ready to step up and take over the operation upon your exit. Management buyouts and generational transfers are oftentimes an obvious strategy given the team in place has a solid understanding of the business, holds the customer/vendor relationships and has an appreciation of the company’s culture.
Common deal structures to facilitate an internal transfer might include gifting or transferring stock through estate planning, seller financing, leveraging bank debt or partnering with outside capital to provide the financing and liquidity needs of the seller. Given shareholder and management dynamics are unique in each company, business owners should seek advice from professional advisers who can help them navigate the complexities of an internal ownership transfer. That includes determining an appropriate valuation of the business, reviewing tax implications and drafting legal documentation.
Peeking Outside
Alternatively, you may elect to look outside the business for potential buyers. This might include strategic acquirers or competitors that are currently in your industry and looking to gain market share or add specialized services or products to expand their core business.
Certain strategic acquirers may have compelling operating angles that would add immediate value to your operation. For example, larger organizations often have professionalized sales and marketing teams in place, internal training and development systems, enhanced purchasing power, access to capital and other specialties that would be beneficial if leveraged in your business.
Additionally, aligning with a strategic buyer may provide a more comprehensive offering to the combined customer base. We have found that many of the most successful strategic acquisitions have been mutually beneficial to both the acquiring company and the target company — 1 + 1 = 3.
Bringing in Big Money
Another option could be selling to a financial buyer or a private equity firm. A financial buyer is an individual or a fund that seeks to invest in privately held businesses with the goal of growing said business and generating a return for the shareholders.
Like strategic buyers, financial buyers come in many different flavors. There are thousands of private equity firms, family offices, independent sponsors, search funds and executive buyers across the U.S. that are actively looking to invest in well-run businesses. Some come with relevant operating experience and provide tangible resources to help support growth, while others may only provide capital and take an inactive or board-level role in the business. The type of buyer and investor profile depends on the selling shareholders’ goals and the needs of the business.
When selling to a financial buyer, there is oftentimes a unique opportunity for owners to sell a majority interest in their business while still retaining a minority equity position. This structure allows the seller to have liquidity on the front end, diversify their personal net worth, and participate in future economic upside. We call this a majority recapitalization, and it is a useful structure when the seller is a few years out from retirement and sees value in aligning with an experienced equity partner who can help support continued growth. In many cases, we have seen sellers extract more value in their retained minority equity stake than they did in the first liquidity event. But beware — we have also heard of partnerships that fail for a variety of reasons.
The Right Fit
Regardless of selling to a strategic or a financial buyer, sellers should always be cognizant of fit. Finding alignment on core mission and values is paramount in setting a transition up for long-term success.
We strongly caution our clients to avoid being blinded by greed or letting deal economics solely determine the decision to sell the business. Unfortunately, it does not take long for decades of reputation building to unwind or for unsatisfied employees or customers to jump ship. Make sure to spend ample time with potential buyers to fully understand their management philosophies, core intentions and long-term goals, and how they view success (and failure). Ask tough questions.
Also, be mindful of the use of debt in a potential deal. Depending on the size of the acquisition, many buyers will leverage debt to finance the acquisition, and each buyer has their own risk profile regarding the use of debt. Do your homework and make sure you are comfortable with the capitalization of the business as it can have an impact on both investor returns and the free cash flow available going forward. Will debt service limit the company’s ability to invest in new equipment, make key hires, weather economic cycles, etc.?
Prepare Early
Business owners should be aware of their options and start planning early for their exit or sale. Waiting until you need to sell will often result in less-than-ideal outcomes.
Additionally, the size, performance and unique attributes of your business will dictate which options may be available. Seek counsel from your tax advisers, legal counsel, wealth or estate planners and reputable investment bankers or business brokers who know the dynamics of your industry. The right advisory team will go a long way in helping you maximize the outcome of a sale and ensure the future of your business is in good hands.
