A major challenge for a small business owner is selling their business for the right price and to the right purchaser. However, in most cases we find that many business owners don’t spend the needed time to do this planning. Consequently, they jeopardize the potential sale price.
Many small businesses will not be purchased from an outside purchaser, (about 5%), but the sale could come from either family members or inside employees of the business.
A 2003 study suggested that owners felt nine out of ten family owned business leaders thought their business will continue to be run by the same family or families in the next five years. [1]
You may have considered keeping the ownership of the business in the family and may have already gifted stock or sold stock to your children. If this is the case, your planning should be more directed to other parts of the financial life, and possibly the role as a passive owner in the business.
If on the other hand you will not have family involvement you are looking at an outside sale or inside sale.
Most of small business sales come from family member, inside employee (or group), and competitors.
If you have determined that the potential purchase will not be an outside sale, or retention of the business by the family, you have three options:
- Sale to co-owner
- Sale to key employee or group
- Or, a combination of the above
Many business owners which considered selling to an insider (s), such as a key man, a key man group, partner, or even competitor, need to define who would be the potential purchaser (s). This represents the potential market for the business. The first decision in this step of selling to the insider is who would be the potential purchaser within your company.
The second decision is when do you wish to depart from your business?
Selling to an Insider
You need to access the desire and the ability of such insiders to purchase your stock and to develop the best means to do so.
I you are selling to an insider, there will be many areas you will have to settle beside the sale price. When are you planning to retire? Will you be selling stock in advance to the buyers? If so, how will they pay for it? What tasks will you start to relinquish to the future owner? What are you going to do to make sure they stay in the business until you want out? These are a few areas to start working on for a successful sale!
I have written a few articles on creating the key man group which would have the potential to purchase the business. There are many strategies to create the value in the business with this group, and allow more flexibility for the future in selling. Since the key person or group is the potential buyer of your business you will want to do all that you can to prepare them for the long haul and profitability. This starts with getting your business in order, setting up strategies, relinquishing tasks, an array of many other tasks. (See my blog: Selling Your Business) Ultimately, the big question will be about the financing of the sale of your business, and the future business potential for the purchaser.
Potential Planning Strategies
Selling to insiders are often faced with some common problems. Such as not having enough cash to meet the fair price. They normally don’t have the funds, and financial institutions are timorous in financing them. Consequently, the owner is financing part of their sale, and taking on risk.
Cash Flow Analysis
This is one of the most important analSysis which should be done. There are a few reasons to complete a “Cash Flow Analysis”. Whether the purchaser has the funds to buy your business or not, they will still be looking to see if the business cash flow is strong enough and has the potential to do the following:
- If the cash flow would fund any service debt if you take back any paper
- To make sure the business can service its own ongoing debt
- To see if there is potential for profit
- To make sure the cash flow justifies the price paid for the business
ESOP – Employee Stock Option Plan:
If your company can qualify, you can sell your company to your employees through an ESOP. This is a great way to sell your business with tax-deductible dollars. This enables you to reward your employees while enabling them to pay for the stock with tax deductible dollars.
The ESOP is not suitable for every company and certain technical requirement must be met. It is always a good idea to see if an ESOP is a viable option to have available.
[1] A 2003 study from the Raymond Family Business Institute.
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