3 options if you’re looking to sell your business
Careful planning is the most important step
With the economy gaining steam and valuations rising, the market is turning more favorable every day for business owners who want to sell their companies.
This is especially true in the middle market – companies with sales of $10 million to $100 million – where deal values tracked by GF Data averaged more than six times earnings in its most recent report.
Statistics also show that 51 percent of private business owners prefer to sell to third parties, while 16 percent favor a management buyout and 15 percent opt to sell to family members or employees.
Those who choose to exit have three basic options:
• The auction process: This is the conventional way to sell 100 percent of a company and works well for retiring owners who decide to hire an investment banker to run a competitive auction to get the highest price.
The banker will spend several weeks gathering business and financial information about the company and developing options for the business owner. If the decision is made to go to market, the banker will use company information to create an offering document, also called a confidential information memorandum. At the same time, he or she will begin surveying the market to create a list of roughly 100 (or more) prospective buyers, both financial and strategic.
With the CIM complete and list in hand, the banker will begin talking with likely buyers and responding to their information requests. He or she will keep the owner informed about indications of interest, the first step in a buyer selection process, which will later include management meetings, site visits, negotiations, requests for more information and – after a term sheet is agreed - due diligence. The banker will spend upwards of 300 hours from start to finish in a typical engagement. He or she will be paid a retainer and/or a monthly fee to cover their time and costs with the bulk of their compensation coming from a “success fee” when the deal closes. The owner will work closely with the banker on this once-in-a-lifetime transaction.
• The negotiated transaction: This is an alternative to the auction process that appeals to business owners who decide to embrace a financial partner while remaining actively involved in the business. Often the owner is in his or her late 50s and sees an opportunity to take money off the table and reduce personal risk while retaining equity in the business and working a few more years.
The investment banker in this case plays a facilitator role - making introductions to qualified buyers one at a time in an effort to find the right fit. The owner knows he or she may not get the highest price but is prepared to sacrifice top dollar to hold onto the role of CEO and own a 20 percent to 25 percent stake in the company post-transaction. A negotiated transaction also appeals to owners who like the idea of another payday, or “second bite of the apple,” when the company is sold a second time. In many ways the negotiated transaction is easier to manage, with less information required up front to start the matching process. The investment banking fees are often paid by the buyer, a scenario that works well for business owners who do not seek active representation.
• The ESOP: There are also times when a business owner decides to reward employees by allowing them to buy him or her out through an employee stock ownership plan, or ESOP. When structured properly, this can be done in a tax-efficient manner, while ensuring the company remains independent even after the owner departs.
It is important for owners considering an ESOP to meet with their investment banker and other advisors to review their options. Planning is key, as is determining if the business is big enough to justify the set up and annual administrative fees. An ESOP can be a very good choice for companies that have steady revenues and strong management teams.
Is one option better than the next? In the end, no one size fits all. Careful planning is the most important step an owner can take to achieve a successful business exit.
Craig Allsopp, a licensed investment banker with Corporate Finance Associates, can be reached at 603-676-6005 or firstname.lastname@example.org.