What Are My Options For Selling My Business?

By: Randall A. Denha, J.D., LL.M.

When starting a business or running a business, the question that often arises is “what is the best way to exit”?

Unfortunately, with the looming tax changes likely to come in the near future, many business owners already considering selling in the next 12 to 18 months and both mentally and financially ready are looking at options. Let’s start with the math. Selling a business, would cost you 23.8% in taxes under the current rules. By next year, that tax bill could reach as high as 43.4%! Remember selling a business is a process that may uncover other gaps and opportunities that you were not aware of. Remember too, this is a process that can take nine to 12 months to complete and as we approach the midway point of 2021, it could be difficult to squeeze this process into six months, but it is important to know the facts, assess your business and crunch the numbers as you decide if it is time to sell.   

The many ways to structure the sale of a business, or exit, and the following options are viable methods of doing so.  Interested in selling your company? Good news, you have a lot of ways to sell.

Sale to a Strategic Buyer

If your primary goal is to exit and raise capital for growth, a sale to a strategic might be ideal. This may mean selling to a public company or larger private business. This transfer alternative likely eliminates any future investment on your part and tends to be on the higher end of the purchase price range. A downside could be some risk for your employees, depending on the rationale for the deal. A strategic buyer is a company already in your industry, one that will immediately realize synergies through the acquisition. These synergies enable the buyer to pay more for the business, but strategic buyers don’t always want to give you, the seller, the credit for that synergy. So, while this could be the best buyer from a valuation standpoint, it isn’t guaranteed to be.

Selling to Trusted Staff — Sometimes Called a Management Buyout (MBO)

Like selling to a family member, selling to trusted employees ensures the business is run by someone or a team who appreciates it and already has a vested interest in its success. In cases where the business operations and success is tightly tied to the influence of the management team or when an outside buyer is hard to find, this can be an excellent option. Many times, however, employees don’t have adequate capital and will need you to finance part of the transition. Also, there might not be a true leader among them who could step up to manage the transaction process as well as the company thereafter.

With your management team, due diligence probably won’t take as long because your would-be buyers should already know just about everything about the company.

Unfortunately, there’s still that lack of money. You’ll probably need to accept less cash at closing and a potentially longer repayment period on your financing. That said, you should have less risk around the continuity of operations.

Sale to a Financial Buyer

Of all sales, this is the most popular of them. A financial buyer is a person or company that can’t realize immediate synergies. They don’t bring anything to the table that is necessarily going to be a game-changer right out of the gate.

A majority of the time, financial buyers will pay a fair price using bank financing. They will want control of the business, though they may want you to retain some equity or at a minimum finance some of the purchase price. For example, they might give you 85 percent of the purchase price in cash at closing and pay you the remaining 15 percent over time. Financial buyers can be those in Private Equity or a Man on the Street. 

Most Private Equity buyers seek companies with more than $3 million in earnings before interest, taxes, depreciation and amortization (EBITDA). If you don’t have that, you shouldn’t plan on selling to PE for your exit.

The exception to this is an “independent sponsor.” Independent sponsors are usually groups of five or fewer folks who get together and make offers to buy companies, then go find the capital to complete the transaction. They tend to be willing to look at smaller deals but still want $1 million and above in EBITDA most of the time.

Both types of Private Equity buyers want fully formed and intact management teams to be in place and remain after the transaction. The investors will help the business to run better but are unlikely to operate it daily.

“Man on the Street”deals look for a business with $3 million or below in EBITDA and you are still doing much of the day-to-day work in the business.  If so, this is the kind of buyer you’re most likely to sell to. These buyers can vary wildly in their capabilities, sophistication and capital. You will want to be sure to qualify individual buyers for their capital as well as their understanding of the acquisition process.

Sale to Employee Stock Ownership Program (“ESOP”

A business with solid prospects and moderate growth may find an ESOP ideal. This option allows the owner to sell to staff via a trust. One option is for the company to make tax-deductible payments into the ESOP, and then the trust gradually purchases owner shares. The other option is for the ESOP to borrow capital from a bank, then purchase the company’s shares (called a leveraged ESOP). ESOP valuations tend to be on the low end of the range, however, that is offset by the potential tax gains. The math can get tricky with an ESOP, so make sure you have advisors who understand the mechanics. An ESOP Program is a tremendous vehicle for selling a portion or all of your business to your employees. However, if you have less than $1 million EBITDA or fewer than 25 employees, it might not be feasible. There are also fees and governance issues to consider going forward, so the juice may not be worth the squeeze.

Stay on as a consultant. 

Have you considered selling the business with the proviso that you remain an advisor? This allows the owner the benefit of current income, the ability to oversee that your business is being run the way that the buyer said they would, plus a period of transition as you go from hectic to normal. This option gives you a long, more controlled goodbye.

Recapitalization.

This ties into several of the options above. With a recapitalization, existing owners finance some of their exit via the business. One option to consider is selling part of the company to a new investor or having the company borrow money to buyout some of your holdings or to take a significant one-time dividend or distribution. A recapitalization (or recap) can work well if you are an active and engaged owner, and willing to continue.

Sale to Family or Other Shareholders

Selling or transferring to daughter, son, sibling, etc. allows you to keep the business in the family. Most business sales from one family member to another usually involves installment payments. These are basically monthly payments that the purchaser will make to the seller. In the meantime, the purchaser will get to run the business and take in the profits. But they will also be responsible for the expenses as well. Since the buyer and seller are both family, the seller will likely trust the purchaser in making those payments without having to do a credit check on them or anything like that. Of course, there will be a promissory note created on record by the seller which outlines the agreement of the sale between both family members. This promissory note is what makes the transaction official in case there is a dispute about ownership in the future. A common method of relinquishing ownership of a business, especially for retirees, is to hand the company to a son or daughter or another relative. If you want to transfer business ownership to a family member, it could be done as a full or partial sale, but it can also be a gift. This transfer of business ownership can be completed tax-free if you gift shares of the company valued at $15,000 or less annually in regular installments.