Thinking of Selling or Exiting Your Business - Who are the Best Candidates?
After a lifetime of hard work starting and building your business, the time comes when consideration of selling the business is in order, whether for retirement planning, estate planning, succession planning, health issues or other reasons. But when the time comes to consider selling your business, who are the best candidates to buy your business from you? This article discusses some likely buyers who might be good candidates for you consider.
First, however, some brief comments about valuation of your business. Private and closely held businesses generally do not have an open market to determine the value of the business like a publicly traded company would have. So owners thinking of selling need to have some realistic idea of what the value of the company is. Valuation of the business is important for many reasons, including realistic expectations in the marketplace and various estate, gift and income tax issues. Consulting with your own CPA and/or other valuation experts may be advisable initially in order to determine a realistic valuation expectation using generally accepted valuation principles. Another source of valuation may be a reputable business broker who will perform valuation services as part of a listing agreement to market and sell your business. In addition, many industries have generally accepted valuation methodologies that people in the industry use in buying and selling companies. Either way, it is reasonable to expect that potential third-party buyers will perform their own valuation of your business, so you need to have a frame of reference to determine whether or not their valuation is realistic compared to your own valuation.
Family Members. If you have family members such as children or grandchildren who are active and capable managers of your business, they may be good candidates to buy the business from you. Of course, to the extent you can objectively evaluate your family members’ ability and desire to own and operate the business into the future, you need to determine whether or not these family members are a good choice to take over the company. If so, then a good structure for them to purchase the business needs to be determined. You may want to consider a sale of shares of the business over time so that family members can purchase the company over time from you, rather than an immediate, outright sale. For one thing, you can remain in control of the company until the family members purchase a majority interest from you. Other “control” mechanisms may be options for you such as voting and non-voting shares. You may also want to consider selling shares at a below market value or outright gifts of shares to family members. But these kinds of transactions have Federal Gift Tax consequences that need to be understood and planned for. Finally, if there are some family members who are involved with purchasing the business and some who are not, then consideration of how any discounted or gifted shares to some family members needs to be balanced in the remainder of your estate planning to be equitable to those family members who are not involved in purchasing the business.
Inside Management Team. If you have an inside manager or management team who are capable managers of your business, they may be good candidates to buy the business from you. Again, you may want to consider a sale of shares of the business over time so that insiders can purchase the company over time from you, rather than an immediate, outright sale. As is the case with family members, you can remain in control of the company until the insiders purchase a majority interest from you. Other “control” mechanisms may be options for you such as voting and non-voting shares. Typically, these kinds of insider sales are made at Fair Market Value for the shares purchase by the insiders. For an outright sale to insiders, consideration of financing the transaction comes into play. You may ask the insiders to secure bank financing or you may be asked to hold some or all of the financing for the transaction. If you are being asked to hold some or all of the financing for the insider purchase, then an entirely different creditworthiness determination needs to be made, including the same kinds of factors a bank might consider such as personal financial statements, personal guarantees, collateral, debt covenants and senior debt (if any) that may be in front of your rights as a creditor.
Others in the Same Business. Often, other companies in the same or similar line of business as yours as are excellent candidates to buy your business. Some candidates may be companies you currently consider to be your competition in business. But, they will likely know and understand your business very well. They will also be able to seamlessly take over your operations without any trial and error mistakes. Next, they may have the financial ability to do an outright purchase to give you a clean exit without worries about family members or insiders having the management and financial ability to successfully carry out the transaction. For example, if your business is one or more fast food restaurants in a particular geographic area, then someone already in the same or similar fast food business who wants to expand into your area might be an excellent candidate to purchase your company to further their expansion plans while giving you a worry-free exit.
Roll-ups. Roll-ups are very similar to sales to others in the same line of business discussed above, except that they have a broader scope. Purchasers involved in roll-ups are not simply trying to expand their own business into new or additional territories, rather their specific focus is to acquire small companies who are in a fragmented industry and make them part of larger, more national business which may be a candidate for larger investors or even a public stock offering or a large-scale sale of the combined companies. For example, if there are hundreds or thousands of small mom and pop dry cleaners scattered all around the country, a roll-up purchaser might buy many of these scattered companies and combine them into one large, national chain of dry cleaners under a single name and business model. This national chain would then be a likely candidate for an initial public stock offering or venture capital or private equity financing in the future.
Venture Capital/Private Equity. VC and/or PE companies look for companies to purchase which can then be spun into larger companies and/or public offerings. Typically, these companies invest in your company with an anticipated exit strategy within just a few years. Or these companies may be putting together a plan similar to a roll-up strategy. Your company may or may not be large enough to attract venture capital or private equity. But if so, careful attention needs to be paid to the long-range plan being pursued by the VC or PE firm and the costs to you or your company can be high, so a clear understanding (which is beyond the scope of this article) of the long-range plan and its costs is critical in VC or PE transactions.
Private Stock Offerings. Private Stock Offerings are a way to sell shares of your company to private investors in order to fund expansion and acquisitions. Again, private investors are generally looking for an overall exit strategy so you need to be clear as to what you are offering in terms of private sales of shares, interim rates of return and what is the long-term strategy and costs associated with a private stock offering and the eventual exit strategy for all investors, including you, from the company. Private stock offering are also heavily regulated by federal and state securities agencies, so proper compliance with these securities rules and regulations can be expensive.
Initial Public Stock Offering (IPO). Small, closely held companies are typically not large enough to be considered for a public stock offering. This is why roll-ups and other kinds of VC or PE transactions may be pre-cursors to a possible IPO since that way sufficient size or scale for a possible IPO can be achieved. Public stock offerings and registrations are very heavily regulated by federal and state securities agencies and stock market exchanges, so a transaction needs to be very large in order to make a public stock offering, including all of the ongoing rules, regulations and filings, feasible.
We recommend careful consultation with experienced business transaction advisors such as experienced legal counsel, accountants, bankers, valuation experts and others in order to discuss and understand the value of your business and the nature and structure of any proposed or considered sale and exit strategy from your company.
McNamee Hosea has an experienced team of business mergers and acquisition partners and associates who have handled tens of millions of dollars of business purchase and/or sale transactions over many years who can assist you with an analysis, transaction structure, documentation and closing of all types of company purchases and sales. Contact Attorney, Mick Jernigan for more information.