By Boyce F. Lowery, CLU, ChFC
Last month, we published an article about four internal sales options business owners should consider when developing an exit strategy to transition into retirement. But internal sales options aren’t right for every business and owner.
As promised, this article covers five options for external sales that successful business owners may wish to examine as they look forward to the next chapter in their lives. Of course, the right exit strategy for you and your business depends entirely on a variety of unique factors, including:
- The type of business you own
- Your priorities for the future of your business and your legacy
- Your financial goals regarding the sale of your business
- Your obligations to employees, clients, and shareholders
- The business’s valuation at the time of selling
You may have other financial and nonfinancial factors particular to your situation as well. It’s important to keep these top of mind as you evaluate your options.
5 Common External Selling Options
As discussed last month, internal sales options involve selling the business to an ESOP or an existing stakeholder; typically your management team, employees, or a family member. External selling options, on the other hand, mean you sell your business to an independent third party, such as a competitor, a client or customer, or an interested investor. See five different options for external sales below.
1. 100% Third-Party Sale to an Outsider
A 100% third-party sale is perhaps the most familiar option business owners think of when first contemplating their exit strategies. A third-party buyer may be an individual or another company and often involves a buyer who believes they have the ability to reduce the operating costs of the business while increasing its profitability. This is sometimes referred to as a strategic sale.
Third-party sales of this nature may be suitable for businesses that are both financially solid and have excellent growth potential. Owners who do not have family members or key employees that are interested or prepared to take on the business may wish to explore a third-party sale, for this option can result in a short timeline in terms of both payout and owner transition.
2. Private Equity Sale
A private equity sale typically involves a private equity firm that purchases a majority stake in a business (80%, for example). Most private equity firms prefer that the owner will stay on for a period of three to five years as they increase the value of the business. Once this three-to-five-year period is up, most private equity firms will resell the business at a profit and provide hefty returns for shareholders.
This type of sale isn’t right for every owner, but it can be suitable for mid-size to larger businesses (usually businesses with a minimum of $1 million in annual profitability) and with a huge growth potential. Owners who sell to a private equity firm stand to benefit from a second payday when the firm resells the business, but must be willing to work for someone else for a few years before fully exiting.
3. Mergers & Acquisitions
In a merger or acquisition, the business is acquired by or merges with another business that has similar goals, strategies, and processes. With this strategy, your buyer may be an existing competitor or another type of business wishing to expand their offerings into your specific niche or industry.
A merger or acquisition by a competitor can sometimes offer business owners a clean break if they don’t wish to stay on after the sale or merger of the businesses. This strategy also allows greater flexibility for the owner to negotiate the sale price, potentially resulting in a higher payout. However, this type of transition typically means that a business owner who is selling his business has little or no say in the future of the business or even whether it continues to exist as it once was. Many employees of the sold business may lose their jobs as the buyer seeks to maximize returns on the investment made.
4. Initial Public Offering (IPO)
Many business owners dream of one day taking their company public and selling shares of it to stockholders at an immense profit. For this exit strategy to work, businesses will need to undergo the process of business valuation and intense scrutiny from investors and analysts. This exit strategy could potentially earn business owners the most money. But successful IPOs are rare and require significant investments of time, money, and effort to go public.
The last strategy we’ll discuss is liquidation, which is perhaps the most final exit strategy that you could make. Liquidation means that you close your business and sell off all of its assets. The proceeds of those assets will of course need to be used to pay off outstanding debts and make payouts to shareholders.
Compared to other exit strategies, liquidation is an option that is relatively quick and easy, although it may not offer as high of a return as some other options. Additionally, business owners who select this strategy risk severing relationships with employees, partners, clients, and others who rely on the day-to-day operations of the business.
How We Help
If you haven’t already, we encourage you to read our article from last month to learn about internal sales options available to business owners. Business exit strategies may be complex and time-consuming, but choosing an exit strategy that’s right for you and your business will save you countless hours of time, money, and heartache.
At Suncrest Advisors, we can assist business owners in developing a custom succession plan, in the event certain triggering events were to occur, and we can discuss a planned exit that will balance the owner’s financial and non-financial priorities. Call us at 888-827-0146 today for a free and confidential consultation to see how we can help.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.