By Ed Rappuhn – SCORE Nashville
Exit planning involves valuing your business and identifying potential buyers. Two weeks ago I discussed business valuation. Today, we’ll look at potential buyers. These include family members, business partners, outside individuals, other companies, and employees. You might run your business differently depending on your planned exit strategy and what would be most important to the likely buyer(s).
Be careful in selling to family members. What if one offspring is interested in running the business and another is not? Or what if you have several children interested in ownership? Can the business that has done well for you support multiple owners? Would co-ownership and subsequent decision-making create problems within the family? For an owner with an only child brought up in the business, however, a family transfer might be the perfect exit strategy.
A business partner is an obvious choice for exiting the business. The partner knows the business and its potential. One of the biggest problems is agreeing on a valuation. Outside valuations or offers from others can help determine a fair price. If you have a partner, the valuation process should be established in a buy-sell agreement long before the sale of the business is contemplated.
Selling to an outside individual might be the cleanest transaction, especially if the sale is for cash. As long you make truthful representations, you can collect the sales price and move on.
Selling to another company can be a great alternative. Another company might achieve economies of scale (volume) or scope (complementary products or services). Some duplicate functions can be combined to lower costs. These factors, as well as the possibility of a stock (vs. cash) transaction, can result in a higher offering price. But look at the history and potential of the company’s stock, how long you must hold the stock before selling, and its liquidity before accepting a stock offer.
Selling to employees can be an attractive choice. You may have to finance some of the purchase price and the payout might depend on future earnings. The benefits include rewarding key employees and a more seamless transition for customers, vendors and others.
A business broker can help sell your business. Typically, brokers receive a percentage of the sale and do not charge until a deal is finalized. The benefits of using a broker include a wider reach in identifying potential buyers, more experience in selling businesses, and perhaps most important, the opportunity to minimize business interruptions during the sales process. These advantages can easily outweigh the fees.
In any alternative you need professional (legal and accounting) representation. You also need to consider whether you are willing to stay on though a transition period. Advance exit planning makes the sale of your business smoother and more profitable.
Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org.