TEN WAYS TO SELL A BUSINESS

Your business will be sold; every privately held business will eventually be sold or transferred. Recognize this fact and give some thought as to who the transferees or buyers might be.

Let us look at the types of transferees you are likely to face:

SYNERGISTIC BUYER
Synergy occurs when the result is more than the sum of the parts, where 2 + 2 = 5. The combining of the two firms can give savings and efficiencies better than the total of the two individual firms’ performances.

The synergistic buyer could be a competitor or a company in your same business in another area. It could be a company not competing but serving the same markets.

You will likely get the best deal from this buyer. The synergy in the merger will allow this buyer to pay more for your business than the typical financial buyer.

You can receive even more from a synergistic buyer if you get two or more of them bidding for your company.

FINANCIAL BUYER
A financial buyer bases an offer on return on investment (ROI). The financial buyer has a ROI criterion. This buyer uses this ROI criterion along with the perceived future cash flow of the business to structure the offer.

VENTURE CAPITALIST
If you have a product with a big market potential, a venture capitalist (VC) will be interested in investing in the company. The VC will insist that you keep part of the equity and stay and run the company. Nevertheless, the VC usually will insist on a majority of the stock and the right to fire you.

The VC will also want a definite exit strategy. Most look to going public in four to five years.

There have been entrepreneurs who have become fabulously wealthy using VCs to finance the start-up. It can happen; several VCs say they are happy if one of 10 investments hits it big. This means nine so-so’s and/or failures for every success.

VCs sometimes invest as financial buyers. You may find an occasional VC looking for only 30% to 40% return on mundane businesses.

PUBLIC OFFERING
If your business is making $1,000,000 after taxes and is projected to grow steadily, investigate going public. Public companies receive a premium price for the liquidity the public market affords.

Going public is not without its down side. You risk up front expenses, whether or not you complete the offering, and many offerings are not completed. You commit to operate in the public fishbowl. You put a whole extra layer of government red tape and expense on your company once you are public. Some entrepreneurs cannot or do not want to deal with such an environment.

A FAMILY MEMBER
Sale to a family member who is competent and trained to take over is different from selling to an outsider. Most people would give better terms to such a person. Many people would be honored to have the family dynasty continue.

You are among the fortunate few if you do have a competent, trained family member waiting in the wings.

EMPLOYEE(S)
Rarely does an employee have enough money to buy a business. One does not build net worth by working for someone else.

Sometimes a sale to a key employee, without any money, will work when there is a long transition period with the seller still on board. The seller must be sure that such an arrangement is workable, because to stop in the middle with only part of the company transferred is fraught with discord, hard feelings and lawsuits.

There have been situations where owners were willing to give the business to the employees, but the employees refused to take it. They saw how hard the owner worked and did not want any part of it.

EMPLOYEE STOCK OWNERSHIP PLANS.
ESOPs are a favorable way to sell a business if the numbers work out for the transaction. In general, a profitable, high payroll, high asset business will work best for an ESOP.
An ESOP has the advantage for the seller of being able to roll over any capital gains to other U.S. stock positions, thus deferring income taxes on the gains.

An ESOP owned company must have management available to carry on should the seller plan to leave.

PROBATE
The ownership of your company will transfer on your death, without fail, if no other provision has been made.

This may be the most tax advantageous method of transfer if it is properly planned because the new owner, your heirs, will get a basis stepped-up to market value of the business at the time of death. Estate taxes will still be due, but the capital gains taxes that would have been paid if you had sold it before death will not be levied.

These tax advantages will be for naught if the heirs have not been trained to manage the business. A spouse, who never worked in the business, taking over on the death of the owner, is a prescription for disaster.

If there are heirs who can manage the business, then they should be a part of your will and estate plan. If there are no heirs or no management qualified heirs, then you should sell the business prior to probate. The results of the probate process can destroy your business.

BANKRUPTCY
For corporations, bankruptcy comes in two forms: 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.

In Chapter 11, some of the company’s debts may be forgiven. Even so, most mid-sized companies filing Chapter 11 end up in Chapter 7 (four of five according to the latest information).

On filing, the bankrupt firm gets another level of debts. The bankrupt firm pays all of the costs of the bankruptcy. This includes the creditor’s advisors, the court and the legal costs. For most situations, bankruptcy only accelerates the spiral of death.

Bankruptcy does not make any sense unless there is a specific strategic debt to be eliminated. The Johns-Mansville bankruptcy was to solve the asbestos claim; the Texaco bankruptcy was to solve the Penzoil claim. These were strategic reasons.

If a company is insolvent or nearing insolvency, it should explore negotiations with creditors (possibly with a turn around specialist) rather than declaring bankruptcy. There have been situations where giving the company to the major creditor resulted in a much better solution for all concerned than bankruptcy.

LIQUIDATION
Many companies are worth more in liquidation than they are as a going concern. In thinking about selling, every business owner should evaluate the liquidation alternative versus going concern value. Liquidation value places a floor under the value of the business.

In some cases, you might sell geographical or topical aspects of a business more profitably than any other method. Buyers get only the elements they want.