CEO Advisor Newsletter July 2023
7 Methods to Sell or Cash Out of Your Business
Business owners have more options than they realize. Lacking a team of professional advisors, including a strong M&A Advisor such as CEO Advisor, Inc., 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 prior to starting a sale process. 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. What does not make sense is to react to a single solicitation to buy your business – you will never get the best price and terms, much less the urgency from the prospective buyer.
If you are serious about selling your company and getting the best price and terms, initiate a competitive sale process with an experienced M&A Advisor, corporate/transaction attorney and a CPA/tax advisor.
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 2) Sell the stock in the company (or units if it is a limited liability company). Stock sales benefit the seller due to capital gains tax treatment, etc., while Asset sales are more beneficial to the buyer, especially from a limitation of liability and tax standpoint.
1. Asset Sale Asset sales involve transferring the company’s equipment, facilities, inventory, customers and customer contracts, as well as, intellectual property, such as proprietary software, trademarks and patents including intangibles like goodwill. Asset sales do not involve liabilities (unless specified by the buyer), are generally protected against prior law suits facing the business, and the buyer elects to hire the employees of their choice.
2. Stock Sale Stock sales involve buying the company as a whole along with the exposure to all of its legal issues and potential problems, as well as, the liabilities of the company, its employees, etc. This is why most sales of small or mid-size closely-held businesses are structured as Asset sales.
3. Partial or Full Sale to a Private Equity Firm Companies with $10 Million or more in Revenue and $1.5M or more in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) can explore selling all or a large portion of their business to a Private Equity firm. This method comes with stipulations but has many advantages and large potential upside. It also enables business owners to take a significant amount of cash upfront and still work as the CEO until the business is sold 100%.
Additionally, smaller companies can be bought out 100% as an add-on acquisition to a larger PE-backed portfolio company. 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. Management Buy Out Selling the business to its management team is also an option for the right company. An owner might use this method when the company has a trusted, extremely competent, entrepreneurial management team that wants to carry on the business, and the management team has the funds or borrowing power for the acquisition. The primary advantage to this method is that the business owner doesn’t have to spend time trying to seek out a buyer. 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, and the business owner may need to provide seller financing which can be very risky.
5. 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 undertaking, 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 this also requires a seasoned, competent management team that will grow the company and increase profits. This is not a preferred method for many sellers and comes with great expense, time and risk.
6. Recapitalization Owners who want to sell their stake gradually, or who want to take some cash out of the business without giving up control, can recapitalize the business by selling a minority interest in the company to a Private Equity firm and taking some cash out of the business by selling founders stock to the PE firm.
7. 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/tax advisor will make it far easier to pursue the method that’s best for you. CEO Advisor, Inc. has the expertise and experience to guide you through this exciting process to grow your business to the next level. 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.
Do You Have an Exit Strategy for Your Family Owned Business?
- For most family and closely-held businesses, planning for succession and an exit strategy is the toughest and most critical challenge they face. 88% of current family business owners believe the same family or families will control their business in five years, but succession statistics tell a different story.
- According to The Family Firm Institute:
- - 3% of businesses operate into the fourth generation and beyond.
- - There is a disconnect between the optimistic belief of today's family business owners and the reality of the massive failure of family companies to survive through the generations.
- - Research indicates that failures can essentially be traced to one factor: lack of family business succession or exit planning.
- Family Business Statistics
- The statistics regarding family businesses does not provide optimism regarding their long-term sustainability: It's estimated that 40% of family business owners currently expect to retire, 70% of family businesses would like to pass their business on to the next generation, of which only 30% actually will be successful, and nearly 43% of business owners have no succession plan in place.
- Keep in mind, selling the business might be the best option for you AND your family.
- When does selling your business make more sense?
- Like so many things in life, timing is critical. To get the best price and terms, the business should be sold on an upswing, with three consecutive years of good, improving financial statements, as well as, in a strong economy. Today's increasing interest rates are only a temporary setback as financial markets and valuations remain relatively strong.
- CEO Advisor, Inc. has decades of experience and expertise in hands-on advising of small and mid-size businesses, including building value, growth capital and buying/selling companies. Contact Mark Hartsell, MBA, President, today for a no cost consultation by calling (949) 629-2520, by mobile phone at (714) 697-3370, by emailing MHartsell@CEOAdvisor.com or visit www.CEOAdvisor.com for more information.