Sep 11, 2019
Many business owners have given significant thought to their exit strategy and the possibility of selling their business. But often, not a lot of thought is given to the type of buyer that would be best for their particular situation. By planning ahead and determining the right buyer for your business, sellers stand a better chance of getting the price and terms they want with the least amount of risk.
Below are buyer options to help determine the right buyer for your business.
A sale to a family member who is competent and trained to take over can be a very attractive option to a seller. It’s possible to get your optimum price, but often sellers give better terms to a family member, which can pose a risk. However, it may be worth it to the seller to continue the family business. When selling to a family member, the seller will often finance a large portion of the price of the business.
It's a rare instance that an employee has enough money to buy the business without the seller financing a significant amount of the business. For businesses of a certain size with a strong management team there could be a management buyout (MBO) which could be an attractive option. Employee Stock Ownership Plans (ESOPs) are also a favorable way to sell your business if you can make the numbers work. In general, profitable, high payroll, high asset businesses work best for ESOPs. The seller has the advantage of being able to roll over capital gains to other U.S. stock positions, deferring income taxes on the gains. If the seller plans to leave the business soon after a sale, an ESOP-owned company must have strong management in place to carry on. The cost to maintain an ESOP can be expensive and usually the seller is donating stock to the employees until thresholds are met and might remain on the hook with the bank.
This type of buyer could be a competitor, a company in a similar business, or a customer or supplier that is looking to gain efficiencies by combining companies. Because of the synergies between the two companies, the buyer may be willing to pay more for your business than another type of buyer. To get the best deal possible, aim to have two or more strategic buyers bidding against each other for your company. Keep in mind that with a strategic buyer, some employees may lose their jobs as some duplicate positions could be eliminated.
These buyers usually have strong financial resources to make an acquisition work and they like to utilize leverage. They may require an owner or key management to operate the business for at least three years after closing, as they normally don't have someone that can step in and run the business. They often look for companies with a minimum EBITDA of $2M, but will consider less than $2M for an add-on. Many PEGs prefer that the seller retain some ownership in the company for a period of time or until the PEG exits. This buyer type will base an offer on certain ROI criteria and the perceived future cash flow of the business. PEGs are not overly concerned with the location relative to where they office, as long as there is a commercial airport within a few hours of the business.
An independent sponsor, also referred to as a fundless sponsor, is an individual or investment group seeking to acquire a company without putting much equity into the business. The independent sponsor finds a business to acquire and later seeks investors that can provide equity to partner and to acquire the company. They most often partner with a Private Equity Group.
Extreme high net worth families often hire a team of professionals that manage the family’s finances, investments and other services. The family office will acquire and invest in and oversee some privately held companies as one of the outsourced solutions for the family. Depending on the family’s background, they may or may not take an active role in the company.
This financial buyer is normally looking to buy a company with their available funds by infusing around 15% to 25% equity of the purchase price and leveraging the remaining balance. Most of these individuals will play an active role in running the company. Sometimes several of these individuals pool their money together to acquire several companies.
Early planning with an eye toward the type of transferee you want will enhance your return and satisfaction when the time comes to sell. For more information or advice about the pros and cons of each buyer type and how to find the right buyer for your business, contact O’Keeffe & O’Malley at 913.648.0185.