Think about it. Whether you’re planning to sell/exit your business now or later, remember that every privately-held business will be sold or transferred, eventually. You will hand your business over to someone, at some time, whether it’s because of desire to sell, health issues, or even death.
Recognizing this fact, you should give some thought as to whom the transferees could be. Here, we look at several possibilities you could face.
- Synergistic Buyer
This type of buyer can be a competitor or 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 synergistic buyers bidding against each other for your company. With a synergistic buyer, some employees may lose their jobs as there could be some duplicate positions to eliminate.
- Private Equity Groups (PEGs)
These buyers usually have strong financial resources to make an acquisition work and they like to utilize leverage. They require an owner or key management to operate the business for 3 to 5 years after closing, as they normally don't have someone that can step in and run the business. They normally look for companies with a minimum EBITDA of $2mm. Many PEGs prefer the seller to retain some ownership in the company for a period of time or until the PEG exits. This financial buyer 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 compared to where they office, as long as there is a commercial airport within 3 hours of the business.
- High Net Worth Individuals (HNWI)
This financial buyer is normally looking for a company that they can purchase with available funds by infusing around 25% equity of the purchase price, have a seller carry 10% and leverage the remaining balance. Most of these HNWI will play an active role in running the company. These buyers normally have a lot of experience in one or two categories; finance/accounting, operations, or sales/marketing.
- Investment Groups or Management Buy-In (MBI)
We are seeing more investment groups of HNWI that are pooling their money to purchase a business. The investors may or may not know each other, but will have a range of skill sets that each HNWI can bring to the table to assist in the growth of the company. These financial buyers look for something close to where they live (city) and will usually play an active role.
- Public Offering
If your business is making $5 to $10 million in EBITDA and is projected to grow steadily, you could consider going public. Public companies receive a premium price for the liquidity that the public market affords. However, it is not without its downside. The cost of an IPO now runs $1 to $2 million minimum up front in expenses, regardless of whether you complete the offering. And you open yourself up to government red-tape expenses, so consider whether this is the right environment for you.
- Family Members
A sale to a family member who is competent and trained to take over can be a very attractive option to a seller. You could get optimum price, but often sellers would give better terms to a family member. However, it may be worth it to the seller to continue the family business. The seller will often finance a large portion of the price of the business.
- Employees, ESOP, MBO
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. Or Employee Stock Ownership Plans (ESOPs) are 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 early on, 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 minimum thresholds are met.
In the event of your death, your heirs may get a stepped up basis to market value of the business. Estate taxes will be due, but the capital gains taxes that would have been paid if you had sold before death will not be levied, possibly making this the most tax advantageous method of transfer. However, these tax advantages mean nothing if your heirs have not been trained to manage the business. Putting an untrained or unqualified person in charge of the business is a recipe for disaster.
If a company is insolvent or nearing insolvency, the owner could explore negotiations with creditors rather than declaring bankruptcy. If bankruptcy is necessary, there are two forms for corporations: Chapter 7, complete liquidation under the jurisdiction of the court, and Chapter 11, in which the court holds off the creditors until it approves a plan to get out of bankruptcy or reorganized. The bankrupt company pays all of the associated costs, including the creditors’ advisors, court and legal costs. In most cases, declaring bankruptcy accelerates the death of the company.
Some heavy asset based companies are worth more in liquidation than they are as a going concern. Evaluate this as an option, as it places a floor under the value of the business.
Planning ahead early on 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, contact O’Keeffe & O’Malley.