Selling Your Business to Employees or Family Members [Transcript]


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[Jay Simicek, Consultant, CEPA]


Jay Simicek:

Today, the topic is Exit Planning Options. There are three basic categories for exiting your business. As you’re transitioning ownership in your business, one is selling inside, selling to insiders, those employees or family members that are currently working in the business, selling outside, to outside entities, outside individual, another company for instance, and a liquidation.


Today, we’re going to talk about selling outside the business, selling to an outsider. This category of options, and there are three options within this category of transition, normally gives a seller the potential for the greatest price. Not always, but in many cases it does. The first of the three options is a sale to a financial or strategic buyer. The second is recapitalization and the third is going public with an IPO. Just a word about the sale to financial and strategic buyers.


A financial buyer is a buyer that’s looking for one thing, it’s looking for return, return on their investment. Financial buyer could be an individual, could be an investor, could be a group of investors that have been together and are looking for good opportunities to buy companies. A strategic buyer is a buyer that thinks or knows that there’s a great synergy with your company when combined with theirs. Okay? This could be, chances are and most probably a company within your industry, a competitor, a customer or supplier. This is more or less the one plus one equals three scenario, where between your research and their research, you’ve come together, and you’re convinced that by combining these two companies, that there can be almost an instantaneous increase in value.


So let’s look at this option of selling to a financial or strategic buyer. On the positive side, obviously, there’s a high price potential here, and that would hold true, especially if you can create a multiple bidding process. If there are more than one buyers that are interested in your business, and you can get them into a bidding process, that would certainly increase the price potential. And with that price potential would come probably more upfront cash as well, because in this type of transaction, there would be a new investment and infusion of dollars into that business to make that combination more successful.


This option may lower the process cost, the process of you transitioning out of your business. It may lower that process cost, especially if you can find a very interested, motivated buyer quickly. This option could also lessen the family issues. If there are internal family issues in your business, this transition could wipe those away. As a negative, there will probably be a lengthened process, especially if there’s a cleanup process, so that the value can be increased. You’ll need a thorough assessment done. And as a result of that assessment, there will be weaknesses perhaps, in your business that need to be cleaned up and a value enhancement project that would follow. So, that could lengthen the process a bit. This process could distract from the current operation, as more and more of your employees or you yourself is involved in this process. Could be a privacy issue, often small business owners are really interested in keeping their transaction private, especially during the early stages of the process in selling their business. Okay?


Letter of intent from an interested buyer is normally the first stage, and that would result in some divulging of information about your business, obviously. If the letter of intent is passed and that buyer is still interested, then the due diligence phase would kick in. During due diligence, you share virtually everything in your business. So if you have multiple buyers that are interested, and you go through the LOI, and the due diligence process with each of them, there could be some privacy issues that would concern you. The synergy analysis is critical. If you’re selling to a strategic buyer, you need to do the analysis, not just let that buyer assume that there’s a synergy. You need to do the analysis, so that you can sell your business and increase its value. And there’s probably going to be a culture change. If you sell 100% of the business at once, then that culture change would be the new buyer’s issue, obviously. But if you do a phased exit, then this new buyer will most certainly change the culture, and if you had a great culture that was really aiding your bottom line, it could change.


Some preparations are obvious, based on what I’ve just said. Let’s whip through these really quickly. There needs to be a financial, and overall business analysis and assessment done. That assessment will lead probably to some kind of a cleanup effort, that will enhance the value of your business, and that’ll require some experienced advisors to help you out there. You need to market your business. Either you will market your business, or maybe you’ll engage the talents of a business broker. You’ll determine whether you want to do a stock or asset sale. Okay? And based on that decision, there’ll be tax consequences. You need to do some homework and you need to research your industry for these potential strategic fits that we’re talking about.


The next option in selling outside is what’s known as recapitalization. In this instance, the positive is that there is additional capital that’s injected into the business. This capital is going to help your asset base. It will probably be capital for growth and expansion of the business, but now you have a partner. This probably will lead to a gradual exit, so that you can plan well in advance. This could be used with other options as well. Okay? This could be a first stage in a staged exit. This injection of capital actually diversifies your corporate assets, which is a good thing.


And the negative side, because you now have a partner who is invested in the business, you may lose some of the control that you had as a sole owner or it could be a negative impact on the culture. Again, you have this influence of a new owner, that might change that positive culture. This could slow down the process or there could be a strategic change. Because of the investment that’s being done, the strategy may change or maybe new product lines, new customer markets that you’re pursuing, et cetera. Now there is accountability to the investor, okay? And that investor would expect that. There may be cost benefit issues. Okay? There is a cost associated to this option, and whether you receive the benefit commensurate with that cost is an issue. But if it’s done correctly, there’s no reason why you can’t do that.


The next option in selling outside is what’s known as a initial public offering or an IPO. Frankly, this option is probably not realistic for most mid-market businesses, but occasionally it is, especially perhaps in the high tech industry where there’s a phenomenal prospect of growth in the future. There’s a chance to get a big payout. Obviously, there is, because now your investors are publicly traded. It’s an expensive… It could be an expensive proposition to take this option and it may be risky. But if it applies to you, talk to your advisors, it may be something you want to pursue. And last but not least, if all the previous options don’t apply, there’s liquidation. Normally we don’t want to be in this situation, but sometimes it is the best choice. On the positive side, if you’re in a situation where the asset value is larger than the ongoing value of a running business, then you’re going to be forced into this situation.


It’s simple, it’s efficient, it’s probably quick to do, and it probably will be less costly as well. On the negative side, you may not get the proceeds that you were looking forward to, and those proceeds may be uncertain up until the later stages of your transition. Sometimes there’s a stigma attached to liquidation. There really shouldn’t be, because sometimes it’s the most logical choice. There are definitely tax issues. Just because you’re liquidating your assets, don’t think that there are no tax issues. You need to consult a tax advisor to make sure that’s being done properly. Obviously, the doors will close on the business, jobs will be lost. Often, if an owner sees the liquidation situation coming up, they maybe tempted to take large payouts and a large salary, large benefits. And then once that kicks in, once that process kicks in, liquidation is pretty much the only option of choice. So, that concludes the session on exit planning options, selling outside. Thank you.


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