Depending on what type of business you have, what your key employees are like, the current market, and your array of potential buyers, business owners may have a long list of candidates to whom they might sell their business. One of the first options owners often consider is to sell the business to an unrelated third-party buyer.
A third-party sale can allow an owner to receive the largest sum of money for their business in the shortest amount of time. Let’s review some of the perks and drawbacks to selling your business to a third-party purchaser.
For some business owners, third-party sales are most appealing because of the potential payoff. Unlike family members or key employees, outside buyers may have the funds to pay for ownership in full. This can mean that you won’t have to accept a promissory note (or at least it may be a smaller part of the deal) or rely on business performance after you have gone.
There are a few caveats, however. First, to receive a maximum payout, you must have your business in order. This means beginning to install crucial Value Drivers that many buyers look for in a business. This often requires the help of several different advisors, so be sure to start building that team of professionals sooner rather than later.
Second, most business owners understand that they probably won’t receive billion-dollar offers for their businesses. But often, business owners will fall into the trap of believing that their businesses are worth more than an objective buyer will pay. There are two things that you can do to avoid this temptation:
Though money is a common reason owners look to sell to third parties, it’s far from the only reason. Another popular reason owners like third-party sales is how much time they can save.
Studies and surveys by a range of organizations consistently report that the majority of business owners want to exit their businesses within the next 10 years. While a typical plan to build up and sell a business can take 5–10 years to create and implement, the right strategies may reduce the time it takes to transfer ownership by pursuing a third-party sale.
Although there may seem to be quite a few advantages to a third-party sale, there is one major drawback to consider.
In terms of third-party sales, one negative factor is that owners can taint the marketplace. Tainting the marketplace can happen if you put the business on the market for sale, then pull the business off the market without selling it. When buyers see that an owner failed to sell the business, it can serve as a black mark on that business, regardless of why the owner takes the business off the market without selling. Tainting the marketplace is frequently a result of business owners desiring the two perks of third-party sales (maximum money and minimal time), failing to get a proper business valuation, and rushing the business out to market because they are ready to leave.
To avoid this problem, follow a disciplined approach to prepare your business, prepare yourself, understand the market, clean up potential problems, and set your expectations, all well before you make your first move toward the sale process.
We help business owners plan for the single most important financial event of their lives – the transition out of their business.
Third-party sales are a two-sided coin. While they may attract the highest sale price, they also can require you to give up control. If you do not receive the entire purchase price in cash at closing, you risk relying on the company’s new owners to perform well enough to support the earn-out or pay off a promissory note. If the company struggles after the sale, and you are reliant on the continued performance of the business you no longer own for post-exit security, you may find that you have to go back to work.
Seller’s remorse occurs when business owners sell their businesses and find that they don’t have anything that they like to do outside of running the business. You may assume that you will figure out what to do after you exit, only to panic as the sale date approaches. Pulling out of a sale can have a ripple effect, since qualified buyers might shy away from businesses that go on the market then come off the market without selling. Additionally, owners who don’t know what to do with their lives without the business can have an unfulfilling post-exit life if they sell the business without a post-exit plan.
Will you be one of the unfortunate owners who finds yourself owing a significant percentage of your sale price to the government in taxes? Without a pre-sale analysis of the business and personal tax consequences of a sale, you may go too far down the path with an attractive buyer before you realize you can’t afford to sell the business for the price they offer.
Buyers commonly want to make changes to their acquisition post-closing. After all, buyers rarely buy businesses unless they think they can make changes to improve them. You may regret selling to a buyer who radically changes your company, which can dampen your post-exit satisfaction. Perhaps more harmful are owners who decide that they cannot stomach a radical change to their businesses’ culture and take them off the market, thereby causing the value of their businesses to drop dramatically (i.e., tainting the marketplace).
There are many assumptions for business owners to make if they decide to pursue a third-party sale. Those assumptions can have negative effects for owners and their businesses if not properly addressed. If you’d like to discuss the plausibility and challenges of a third-party sale for your business, please contact us today.
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