Entrepreneurship is a wonderful thing; however, at some point, entrepreneurs may decide to sell their businesses for a number of reasons ranging from an impending retirement to partner dispute to new entrepreneurial pursuits. Establishing the seller’s desire for a sale makes for a better sale strategy and allows the seller to find the right buyer. Furthermore, finding the right buyer for your business will allow for a smooth transition in ownership and continued success for your company.
Typically, buyers come in three types: internal, financial and strategic. Depending on the seller’s motivation for a sale, a particular type of buyer may be best suited for the company.
An internal buyer is a company employee or a long time independent contractor who is immersed within the company. Often, employers sell to internal buyers as part of a long-term plan to reward key employees and a gradual transition of the retiring owner. However, internal sales typically bring the lowest sale price and often require seller financing. Additionally, the long-term plan of an internal sale may not be ideal for the seller’s timeline or the company may have cash flow issues if part of the sale is company financed.
Commonly, internal sale prices are discounted to reflect the buying employee’s “sweat equity” in years prior to the sale. The sale terms will likely be more flexible than with a third party buyer. Some factors that could impact the ultimate sale price are: the upfront cash payment, the number of years the remaining payments are made, the tax treatment of the payments, and any element of payment adjustment such as a bonus payout based on certain targets. The more the factors favor the buyer, the higher the sale price should be.
Another option available is an external sale to a financial buyer. A financial buyer is an external buyer who sees the current business as something he wants to acquire and run. Depending on the industry, a seller can typically command a mid-market price from a financial buyer. The financial buyer will be most interested in the financial health of the company and its ability to generate healthy returns. These transactions can happen much faster than an internal sale depending on how quickly the buyer is looking to close the deal. Sellers who prefer to sell the business and move onto the next venture would find financial buyers to be a good type of buyer based on the timing of the transaction. Finally, sellers should ensure that of its corporate and financial records are in order to maximize the sale price and accelerate closing the sale.
A third option is another type of external buyer, a strategic buyer who is specifically looking for a niche company. Commonly, a strategic buyer already owns a business, which is either similar or complimentary to the seller’s company. A strategic buyer is looking to make acquisitions to expand the existing business, strengthen the company brand, improve the leadership team or to access recurring revenue. A strategic buyer usually brings the highest price.
In addition to determine the best type of buyer for the company, a seller must also consider other factors about the buyer regarding the buyer’s vision and plan for the company. What are the buyer’s intentions for continuing with the business and is this something that is acceptable to the seller. For example, if a business owner is looking to sell the company to someone who will continue to carry out the vision of the business owner, an internal buyer who is invested in the company culture may be a better fit than a financial buyer who has different plans for the company. For more information on how to target particular buyers or how to sell your business, please contact Sheila Seck at 913-815-8485 or by email.