Exit Planning: Who's Going to Buy Your Business?
May 12, 2015
As you and your business mature, you may be starting to think about selling or transferring your business within the next few years. The big question is: who will buy it?
There are a number of options that may be viable transition solutions, including the following potential buyers:
Family members. There are some great companies with great stories about long-term family ownership. We also know of many examples, however, where family ownership has been rife with problems and where company value has declined when the next generation has run the business poorly. A transition to family needs careful guidance, structure and often benefits from an unbiased third-party consultant.
Employees. This is very appealing to some owners who want to take care of their people, and there are various strategies to structure these types of transactions, such as an Employee Stock Ownership Plan. However, relatively few employee groups have the financial capacity to pay an owner what the business is worth.
Outside party. The majority of sales are actually to competitors, or other potential buyers.
Private equity group. Private equity groups (PEGs) are firms that raise funds, invest in companies and then exit, hopefully at a gain. Each group generally has certain types of industries and company sizes they like to invest in. For example, they may require the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to be over $2M. Their deals might start with an ownership interest of 70 percent, for example, as they sometimes like to have the owner involved in continuing to grow the business and business value. This gives both the PEG and the owner an upside in that the owner remains involved in the success of the business while the PEG is assured that they have maintained corporate knowledge and time to make the transition successful. Some PEGs are also interested in minority positions.
Family office. This entity operates similar to a private equity group, but is unique in the fact that it is established solely to manage a family's wealth. As a result, family offices control their own wealth and are not required to work with other investors, which allows for quicker decision making and more flexibility with respect to investment timelines. Furthermore, these organizations are less restricted in their selection criteria for investments.
Start Taking the Next Steps
There are several steps to take if you are thinking about selling or transitioning your business now, or in the future. First, it is important to get a realistic expectation of what your business is worth now and how to increase that value. In addition, it is helpful to truly understand what your transaction options are. You can do this by arranging to talk with a transaction advisor who can introduce you to PEGs, investment bankers and brokers.
It's never too early to start exit planning. You may face a challenging and highly competitive market when the time comes to sell your business. Even if a potential exit is years away, it's important to focus now on key business issues, develop a planning process for the future exit and coordinate services with a wealth management team.
We encourage you to contact your Eide Bailly service provider, or a member of our transactions services team, to discuss how our Firm can help you make sound decisions with future business transitions.