You’ve got several choices. The trick is finding the right one.
Interested in selling your company? Good news, you have a lot of ways to sell. That’s also the bad news. It can be daunting to figure out what option is best for you. I’ll try to spur your thinking at a high level with a review of the most common transactions we see.
Sale to a Strategic Buyer
A strategic buyer is a company already in your industry, one that will immediately realize synergies through the acquisition. These synergies enable the buyer to pay more for the business, but strategic buyers don’t always want to give you, the seller, the credit for that synergy. So, while this could be the best buyer from a valuation standpoint, it isn’t guaranteed to be.
You may also have competitive concerns and will want to be sure you enlist a very capable M&A attorney and adviser who can time the release of information to a strategic buyer so your exposure risk is mitigated. You don’t give away everything at once. Otherwise, if the deal falls through, your competitor could walk away with inside information about you.
Sale to a Financial Buyer
In our experience, this kind of transaction accounts for about 80 percent of all business sales. A financial buyer is a person or company that can’t realize immediate synergies. They don’t bring anything to the table that is necessarily going to be a game-changer right out of the gate.
A majority of the time, financial buyers will pay a fair price using bank financing. They will want control of the business, though they may want you to retain some equity or at a minimum finance some of the purchase price. For example, they might give you 85 percent of the purchase price in cash at closing and pay you the remaining 15 percent over time.
Financial buyers come in many shapes and sizes:
Private Equity // Most PE buyers seek companies with more than $3 million in earnings before interest, taxes, depreciation and amortization (EBITDA). If you don’t have that, you shouldn’t plan on selling to PE for your exit.
The exception to this is an “independent sponsor.” Independent sponsors are usually groups of five or fewer folks who get together and make offers to buy companies, then go find the capital to complete the transaction. They tend to be willing to look at smaller deals but still want $1 million and above in EBITDA most of the time.
Both types of PE buyers want fully formed and intact management teams to be in place and remain after the transaction. The investors will help the business to run better, but won’t actually operate it daily.
“Man on the Street” // If your business is $3 million or below in EBITDA and you still do much of the day-to-day work in the business, this is the kind of buyer you’re most likely to sell to. These buyers can vary wildly in their capabilities, sophistication and capital. You will want to be sure to qualify individual buyers for their capital as well as their understanding of the acquisition process.
Sale to Management Team
Your management team (if you have one) is an ideal buyer for most businesses. There might be a couple drawbacks, though, starting with a lack of capital. And there might not be a true leader among them who could step up to manage the transaction process as well as the company thereafter.
With your management team, due diligence probably won’t take as long because your would-be buyers should already know just about everything about the company.
Unfortunately, there’s still that lack of money. You’ll probably need to accept less cash at closing and a potentially longer repayment period on your financing. That said, you should have less risk around the continuity of operations.
Sale to ESOP
An Employee Stock Ownership Program is a tremendous vehicle for selling a portion or all of your business to your employees. However, if you have less than $1 million EBITDA or fewer than 25 employees, it might not be feasible. There are also fees and governance issues to consider going forward, so the juice may not be worth the squeeze. Look for resources at www.esopassociation.org.
Sale to Family or Other Shareholders
If you have multiple owners in your business and you want out, the natural buyer is another incumbent shareholder who can pay you out for your shares. You still will have to agree on a valuation and timing of payment, which can be very complicated.
