February 2024 Newsletter
8 Methods to Sell or Cash Out of Your Business
Selling your business is a very complex process and most business owners have never been through a sale process before. But business owners have more options than they realize. Lacking a team of professional advisors, including a strong M&A Advisor, corporate/transaction attorney and a CPA/tax advisor could have serious financial and tax consequences for both the business owner and the company.
Seek professional help from the beginning of the sale process. CEO Advisor, Inc. can provide the expertise to guide and advise you through your exit strategy and sale of your company. It pays to understand the various methods to sell or partially cash out of your business for a successful exit.
An outright sale could be the simplest and best way to exit a business. This makes sense when a business owner’s family members have no interest in taking it over, or when the owner does not have the desire or capital to take the company to the next level.
There are several ways to sell your business. Regarding the structure of a sale, a business owner can, 1) Sell the company’s Assets outright, or you can 2) Sell the stock of the company (or Interests if it is a limited-liability company). Stock sales benefit the seller, while Asset sales are more beneficial to the buyer, especially from a liability and tax standpoint and your advisory team can assist you with more information.
1. Asset Sale. Asset sales involve transferring the company’s Assets, including the customers and customer contracts, as well as, equipment, intellectual property, such as trademarks and patents plus intangibles like goodwill. Asset sales do not involve liabilities (unless specified by the buyer) and are generally protected against prior law suits facing the business. In an Asset sale, the buyer will make employment offers to select employees or all employees.
2. Stock Sale. Stock sales involve buying the company itself along with the exposure to all of its legal issues and potential legal or tax issues, as well as, taking on the liabilities of the company. This is why most sales of small or mid-size, closely-held businesses are structured as Asset sales. In a Stock sale, the employees are part of the company and any changes to personnel are likely to come after the transaction is closed.
3. Partial or Full Sale to a Private Equity Firm. Companies with $10 Million or more in Revenue and $1.5 Million or more in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) can explore selling all or a large portion of their business as a portfolio company to a Private Equity firm. This method comes with stipulations, but has many advantages and potential upside of “A second bite at the apple” when the entire company is ultimately sold to a strategic buyer or larger Private Equity firm. It also enables business owners to take a significant amount of cash upfront and still work as the CEO or other role until the business is sold 100%. There are thousands of Private Equity firms in the United States, and CEO Advisor, Inc. has many relationships with PE firms as potential buyers of your business.
4. Sale to a Private Equity Firm for Smaller Businesses. Companies with less than $10 million in Revenue and possibly lesser EBITDA can be sold to a Private Equity firm as an add-on or bolt-on acquisition to an existing portfolio company of the Private Equity firm. Once a Private Equity firm acquires a portfolio company, they aggressively seek to acquire add-on acquisitions to accelerate the growth and value of the portfolio company. As an add-on acquisition, the odds are that the PE firm will want to acquire 100% of the company and integrate it into the portfolio company.
5. Recapitalization. Owners who want to sell their ownership stake gradually, or who want to take significant cash out of the business by selling some of their personally owned shares without giving up control can recapitalize the business. This is typically done by working with a Private Equity firm by directly selling a portion of your Common shares, plus Preferred Stock and/or debt. The Private Equity firm would be an outside investor that is interested in acquiring the business, but doesn’t want to buy it outright upfront (or you are not interested in selling 100% at this time).
You could sell a minority interest in your company to a Private Equity firm using your own Common stock at an agreed upon valuation, (and your company could also issue Preferred Stock and sell these additional shares to the Private Equity firm at an agreed upon valuation). Selling your personal stock gives you as the owner cash upfront, while the Private Equity firm investor will be a valued partner to help you build value and work toward a successful exit in the future.
6. Management Buy Out. Selling the business to its management team can also be a possible option for the right company. An owner might use this method when the company has a trusted, professional management team that wants to carry on the business, and the business owner(s) has confidence in their ability to grow and maintain profitability. The primary advantage to this sale method is that a buyer may simply not be available for this particular company.
The trade-off for a streamlined sale (assuming family issues don’t complicate the process) is that the purchase price may be lower than what an outside strategic buyer would pay. Additionally, the business owner will have to provide seller financing, which comes with certain risks as the business may not remain profitable and the management team may not be able to make the debt payments to the business owner (seller), which triggers a whole series of issues.
7. ESOP. Another option is to sell the company to its employees through an employee stock-ownership plan (ESOP). Setting up these plans can be a complex and expensive undertaking for both legal and tax purposes, but they have their advantages. With an ESOP, the owner may want to remain with the company while slowly transitioning the business over time. It’s a way to reward employees with a long-term incentive for loyalty and hard work, but it is highly important that the company have a strong management team that can ensure the company is managed well and remains highly profitable.
With an ESOP, the company typically sets up an independent trust (the ESOP) that buys the owner’s stock at a price set by an independent valuation firm. The trust holds the stock for the employees for as long as they work for the company. When an employee leaves or retires, he/or she can sell the stock back to the company at fair market value.
This can be a challenge as some business owners don’t like having a third party determine the value of their business as it may mean accepting a lower price than they could receive on the open market. Also, the company has to grow or have cash on hand to buy back employee shares when workers leave, which can be a real problem for many companies. This can divert cash from other business uses and can be a real cash drain if several employees leave the company in close proximity.
8. Debt Buy Out. If there is no readily available buyer and the business has healthy cash flow, the company might take on debt to buy out all or a portion of the owner’s stake. This is similar to a Management Buy Out, and must be evaluated carefully between you and your advisors.
There are many options for business owners who want to sell or cash out. The best method depends on the desire and health of the business and the owner. Understanding your options and getting the right advice from a team of experienced business professionals, such as an M&A Advisor, corporate/transaction attorney and a CPA/financial advisor will make it far easier to pursue the method that’s best for you.
CEO Advisor, Inc. has the expertise and experience to help you focus on your exit strategy and the sale of your business. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Seek professional help from the beginning of the sale process. CEO Advisor, Inc. can provide the expertise to guide and advise you through your exit strategy and sale of your company. It pays to understand the various methods to sell or partially cash out of your business for a successful exit.
An outright sale could be the simplest and best way to exit a business. This makes sense when a business owner’s family members have no interest in taking it over, or when the owner does not have the desire or capital to take the company to the next level.
There are several ways to sell your business. Regarding the structure of a sale, a business owner can, 1) Sell the company’s Assets outright, or you can 2) Sell the stock of the company (or Interests if it is a limited-liability company). Stock sales benefit the seller, while Asset sales are more beneficial to the buyer, especially from a liability and tax standpoint and your advisory team can assist you with more information.
1. Asset Sale. Asset sales involve transferring the company’s Assets, including the customers and customer contracts, as well as, equipment, intellectual property, such as trademarks and patents plus intangibles like goodwill. Asset sales do not involve liabilities (unless specified by the buyer) and are generally protected against prior law suits facing the business. In an Asset sale, the buyer will make employment offers to select employees or all employees.
2. Stock Sale. Stock sales involve buying the company itself along with the exposure to all of its legal issues and potential legal or tax issues, as well as, taking on the liabilities of the company. This is why most sales of small or mid-size, closely-held businesses are structured as Asset sales. In a Stock sale, the employees are part of the company and any changes to personnel are likely to come after the transaction is closed.
3. Partial or Full Sale to a Private Equity Firm. Companies with $10 Million or more in Revenue and $1.5 Million or more in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) can explore selling all or a large portion of their business as a portfolio company to a Private Equity firm. This method comes with stipulations, but has many advantages and potential upside of “A second bite at the apple” when the entire company is ultimately sold to a strategic buyer or larger Private Equity firm. It also enables business owners to take a significant amount of cash upfront and still work as the CEO or other role until the business is sold 100%. There are thousands of Private Equity firms in the United States, and CEO Advisor, Inc. has many relationships with PE firms as potential buyers of your business.
4. Sale to a Private Equity Firm for Smaller Businesses. Companies with less than $10 million in Revenue and possibly lesser EBITDA can be sold to a Private Equity firm as an add-on or bolt-on acquisition to an existing portfolio company of the Private Equity firm. Once a Private Equity firm acquires a portfolio company, they aggressively seek to acquire add-on acquisitions to accelerate the growth and value of the portfolio company. As an add-on acquisition, the odds are that the PE firm will want to acquire 100% of the company and integrate it into the portfolio company.
5. Recapitalization. Owners who want to sell their ownership stake gradually, or who want to take significant cash out of the business by selling some of their personally owned shares without giving up control can recapitalize the business. This is typically done by working with a Private Equity firm by directly selling a portion of your Common shares, plus Preferred Stock and/or debt. The Private Equity firm would be an outside investor that is interested in acquiring the business, but doesn’t want to buy it outright upfront (or you are not interested in selling 100% at this time).
You could sell a minority interest in your company to a Private Equity firm using your own Common stock at an agreed upon valuation, (and your company could also issue Preferred Stock and sell these additional shares to the Private Equity firm at an agreed upon valuation). Selling your personal stock gives you as the owner cash upfront, while the Private Equity firm investor will be a valued partner to help you build value and work toward a successful exit in the future.
6. Management Buy Out. Selling the business to its management team can also be a possible option for the right company. An owner might use this method when the company has a trusted, professional management team that wants to carry on the business, and the business owner(s) has confidence in their ability to grow and maintain profitability. The primary advantage to this sale method is that a buyer may simply not be available for this particular company.
The trade-off for a streamlined sale (assuming family issues don’t complicate the process) is that the purchase price may be lower than what an outside strategic buyer would pay. Additionally, the business owner will have to provide seller financing, which comes with certain risks as the business may not remain profitable and the management team may not be able to make the debt payments to the business owner (seller), which triggers a whole series of issues.
7. ESOP. Another option is to sell the company to its employees through an employee stock-ownership plan (ESOP). Setting up these plans can be a complex and expensive undertaking for both legal and tax purposes, but they have their advantages. With an ESOP, the owner may want to remain with the company while slowly transitioning the business over time. It’s a way to reward employees with a long-term incentive for loyalty and hard work, but it is highly important that the company have a strong management team that can ensure the company is managed well and remains highly profitable.
With an ESOP, the company typically sets up an independent trust (the ESOP) that buys the owner’s stock at a price set by an independent valuation firm. The trust holds the stock for the employees for as long as they work for the company. When an employee leaves or retires, he/or she can sell the stock back to the company at fair market value.
This can be a challenge as some business owners don’t like having a third party determine the value of their business as it may mean accepting a lower price than they could receive on the open market. Also, the company has to grow or have cash on hand to buy back employee shares when workers leave, which can be a real problem for many companies. This can divert cash from other business uses and can be a real cash drain if several employees leave the company in close proximity.
8. Debt Buy Out. If there is no readily available buyer and the business has healthy cash flow, the company might take on debt to buy out all or a portion of the owner’s stake. This is similar to a Management Buy Out, and must be evaluated carefully between you and your advisors.
There are many options for business owners who want to sell or cash out. The best method depends on the desire and health of the business and the owner. Understanding your options and getting the right advice from a team of experienced business professionals, such as an M&A Advisor, corporate/transaction attorney and a CPA/financial advisor will make it far easier to pursue the method that’s best for you.
CEO Advisor, Inc. has the expertise and experience to help you focus on your exit strategy and the sale of your business. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
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