When most business owners decide they want to sell their company they often realize that they don’t know what sale options are available to them. There are quite a few exit strategies available to owners of businesses of all sizes, and in this article we will explore the 6 most common options for selling a business and put them in the context of achieving a seller’s goals. Those options include:
- Auctioned Sale to a Strategic Buyer
- Auctioned Sale to a Financial Buyer
- Management Buyout
- Sale or Gift to a Family Member
- Non-Auctioned Strategic Sale
The best way to choose the appropriate exit strategy is to start by determining what financial and non-financial goals the owner wants to achieve from the sale. While specific goals for each business owner vary widely, we generalize them into just three categories: 1) maximizing sale price, 2) employee welfare, and 3) continuity. For some sellers, financial goals are all that matter. They want to maximize the sale price for the business, and everything else is secondary. For others, the welfare of their employees after the sale outweighs the need to maximize the sale price. Still other sellers are most concerned with continuity and knowing that after the sale their company will keep its current name and continue to be run in the manner they managed it. After the business owner has thought through their goals for selling their company they will be ready to determine the best way to sell their company.
1. Auctioned Sale to a Strategic Buyer
Goal: Maximizing Sale Price
If achieving the highest sale price is the primary goal of the seller then an auctioned sale to a strategic buyer is one of the best routes to choose. By auctioned sale, I’m not referring to the type of auction that employs a fast-talking auctioneer with a gavel, but rather an auction process run by an investment banking firm such as Waypoint Private Capital. In that type of auction process, we prepare offering materials, introduce the opportunity to a carefully selected group of potential buyers, help management give presentations to those buyers, and give company tours to inform prospective buyers about the company. When we feel the interested parties are well informed, we will call for initial purchase offers to be submitted on a specific date. We then compare those offers, give clarifying information to prospective buyers, and direct those prospective buyers where they need to improve their offers. We then call for another round of offers. This process may end after the second round of offers or continue for a couple more rounds until we are satisfied that the maximum sale price has been discovered with a buyer who is capable of completing the acquisition. An auctioned sale to a strategic buyer will almost always maximize the sale price for a single transaction because it causes a competitive bidding process that uses market forces to discover the maximum sale price.
2. Auctioned Sale to a Financial Buyer
Goal: Maximizing Sale Price
An auctioned sale to a financial buyer (e.g. private equity firm or independent sponsor) follows the same process as the auctioned sale to a strategic buyer and is often combined with the auctioned sale to a strategic buyer when the owner’s intention is to sell 100% of the company. In that case, maximizing initial sale price is the primary consideration and will be achieved through this type of auction.
However, sometimes an owner realizes there are still significant growth opportunities for the company, but he does not have the resources or risk tolerance to pursue those opportunities on his own. In that case he may sell the company in a two-step process by selling 80-90% of the company to a financial buyer in the initial sale, helping the buyer realize those growth opportunities over the next three to five years, then selling the remaining 10-20% of the company in the second step when the financial buyer sells the company. Pursuing this type of sale utilizes an auction process similar to the auctioned strategic buyer process, but in addition to trying to maximize the sale price for the initial 80-90% sale, the seller needs to determine which financial buyer will be the best partner to help them grow the company so they can maximize the value of the remaining 10-20% when they sell in the second step. The initial sale through this process often doesn’t result in a sale price as high as a seller could get by selling to a strategic buyer, but with the right financial partner, the initial and follow-on sales may result in a significantly higher combined sale price. This process is complicated, but Waypoint Private Capital has a great deal of experience in this area and can guide companies through the process.
3. Management Buyout
Goal: Employee Welfare
Management buyouts are one of the methods for selling a company that achieves the goal of maximizing employee welfare. Unfortunately, this option is often overlooked because the owner assumes the management team doesn’t have the money to acquire the company. That may be true, but management buyouts are highly financeable transactions with a great deal of interest from both private equity firms and banks. If the owner of a business feels he has a strong management team in place that can run the business after the sale, he should discuss a sale with the team to determine if they would be interested in buying the company. If they are interested, he should encourage them to put together an offer. The team should work with a firm like Waypoint Private Capital to help them value the company and put together an offer that is financeable. The owner of the company will surely negotiate certain points in the initial offer, but should keep in mind that the terms of the sale must be fair so the management team can secure the necessary acquisition financing. Once the negotiated offer has been accepted by the seller, the management team will work with its investment banker to find the equity and debt financing partners that are a good fit with the management team, offer the fewest changes to the deal already negotiated with the seller, and offers the management team the largest equity stake in the company. A management buyout may not maximize the sale price to the owner, but it usually results in a fair valuation that has the additional benefit of allowing the owner to recognize the contribution his management team has made in his success and help to set them up for their own shot at the creating some wealth.
Goal: Employee Welfare
An ESOP (Employee Stock Ownership Plan) is another valid option for selling a company that achieves the primary goal of maximizing employee welfare. This option usually doesn’t result in the maximum sale price for the seller, but results in a fair sale price (as determined by a third-party valuation firm) while selling the company stock to its employees. Because this type of sale must follow specific ERISA rules it will be a bit slower, require quite a few advisors, and have significant initial transaction fees and annual valuation and trustee fees after the sale. This option also has more risk for the selling business owner as it is common for the owner to provide seller financing in these transactions and guarantee the bank debt used in the transaction. ESOP transactions typically have tax advantages to the seller because installment sales push a portion of the capital gains taxes into the future, and offers significant tax savings to the company after the sale. In addition to maximizing employee welfare, ESOP transactions also maximize post-sale continuity because the company name, management team, and employees stay intact.
5. Sell or Gift to a Family Member
The owners of smaller business often think that selling or giving the business to their adult children or other family members is their only option. As we have explored above, there are usually many other options for the sale, but if continuity of the company is the major goal of the owner, they should certainly explore a sale or gift to a family member. If selling or gifting the company to a family member, the owner will need to work with a financial advisor, estate attorney, and a valuation advisor to make sure that everything is structured in the most tax advantageous manner for both the seller and the family member. Then the sale or gift can be completed in a single step or gradually over time. Continuity is typically maximized through this process if the family member has been actively involved in the business prior to the sale or gift.
6. Non-Auctioned Strategic Sale
Goal: None Achieved
The most common method for selling a company is a non-auctioned strategic sale to a competitor. While this is the most common method for selling small and middle market companies, it is usually the worst method for selling a company because it isn’t likely to achieve any of the seller’s goals. Negotiating a sale with only one strategic buyer rarely results in maximizing the sale price because the seller doesn’t have the negotiating power that comes from competition and market feedback in an auctioned strategic or financial sale. It is very difficult to protect the management team and employees in this type of sale, so the welfare of the employees isn’t likely to be secured. Further, continuity is rarely achieved when selling directly to a single competitor because they almost always make significant changes to the company and management team after the acquisition. With none of the seller’s goals being achieved, the only rationale for following a non-auctioned strategic sale process is convenience and a small savings on fees. This is an ill-advised method for selling a company that should only be followed by uninformed business owners.
Business owners have many available options to consider when selling their business. We explored the six most common ways to sell a business and the goals they achieve for the seller, but each option warrants further exploration. The professionals at Waypoint Private Capital have significant experience working with business owners to help them achieve their goals in a sale process. Please give us a call if you would like to continue the conversation.