Identifying Buyers for your Business: Understanding Your Sale Options

Whether you’re selling only the physical assets of your business, selling a portion of your business, or selling the entirety of your business, when you’re ready to exit, you have options. As you plan your exit strategy, consider selling your business to employees, passing down to family, or listing on the open market. There are several options to consider when weighing your options, depending on the structure of your business and your sale plans.

Option 1: Selling Your Part of the Business to an Existing Partner

Most partnerships are launched with legal documents that include a buy-sell agreement. If a partnership agreement is in place (and you should never enter a partnership without one), it stipulates the pre-defined route for a partner exit – including the price and procedure for selling and departing.

Considerations: While selling to a partner likely results in little disruption to the business, a near-immediate sale and exit, the likelihood of a cash payout and, if desired and negotiated, post-sale involvement as a board member or advisor, it seldom results in the highest possible selling price.

Option 2: Partially Selling to a Key Employee or New Co-owner or Partner

A partial sale of the business requires a detailed business valuation, determining what percentage of ownership to sell, drawing up legally binding partnership and buy-sell agreements, and becoming a co-owner or partner rather than the sole owner of the business.

Considerations: A partial sale allows owner flexibility in determining future business involvement and provides continuity for staff and clients. Especially if the partial sale is to a key employee, it rarely results in a top-dollar sale price and probably results in payments made over the coming years.

Option 3: Selling to Another Business

Businesses or private equity groups acquire businesses, in full or in part, for strategic rather than purely financial reasons, most often to expand capabilities, market reach, competitiveness, and profitability. This is accomplished through integrating the offerings of the purchased business into those of the established business, which is usually larger and stronger than the business being purchased.

Considerations: A business-to-business sale allows for the possibility of a strong selling price and immediate payoff, though sale terms often require the seller’s ongoing involvement in the business for a designated period of time.

Option 4: Partially Selling to Another Business

Selling a portion of your business to another business forms a strategic partnership with a business partner that can result in greater financial, operational, distribution, or marketing strength.

Considerations: A business partnership can be structured to include a succession plan that gradually sells the entirety of one business to the partner business. As in any partnership, this approach requires a detailed valuation and legally binding agreements that specify terms and timelines.

Option 5: Transitioning to Next-Generation Family Members

This sale approach is the choice of as many as one in every three business owners. It rarely results in a top-dollar payoff, but by passing ownership to an heir or heirs, the business stays in the family, the seller often has flexibility to determine post-transition involvement, and staff and clients usually experience the least disruption.

Considerations: This is an easy plan to consider and a complicated one to arrange. It requires consultation with attorneys and accountants to establish the valuation, create business transfer plans, and address tax- and estate-planning issues. If there is more than one able and interested heir, it also requires deciding which will assume business control and how others will be included in the transition plan – usually by transferring some of the business value and therefore a portion of the owner’s wealth to the others, even if they don’t attain business ownership.

Option 6: Selling to Employees

Selling a business to employees involves a tax-qualified, defined employee benefit plan, called an employee stock ownership plan, or ESOP, through which employees buy or otherwise accumulate shares of the business quickly or over time, depending on how the plan is structured. It provides tax advantages, a phase-out of owner involvement, and continuity for staff and clients.

Considerations: An ESOP requires the involvement of an ESOP attorney. It also requires an employee or group of employees capable of taking over the business and ongoing involvement of the owner over the period, often years, between when the ESOP transfer begins and when the employee or employees assume full ownership.

Option 7: Selling to an Individual Buyer

Selling a business to someone who wants to buy rather than start a business, in part to avoid start-up risk and to benefit from established systems, products, staff, clientele, sales, and cash flow. Many business sales involve seller financing – basically a seller-financed loan accompanied by an often-sizable down payment and a secured promissory note – those seeking a business for sale realize that it’s often easier to finance a business purchase than to undertake a business start-up.

Considerations: Businesses with strong earnings and with sale terms that include seller financing are more likely to result in successful sales and higher prices. If your business is in strong condition and attractive to buyers, selling to an individual provides the greatest opportunity to achieve a timely sale at a good price and, possibly, post-sale involvement with the business – should that be of interest to you and the buyer.

Option 8: Liquidating

Liquidation is often a last resort and always the lowest-value exit approach. It involves selling all tangible assets that can be converted to cash (including furnishings, fixtures, equipment, and inventory), collecting outstanding receivables, paying off debts, addressing contractual obligations, formally releasing employees, dealing with legal and financial obligations, and closing up shop.

Considerations: Liquidation results in no compensation for the goodwill or going concern value of a business. It becomes the exit option when the sale value of a business is the same or nearly the same as the sale value of its physical assets, or if the owner wants or needs an immediate exit from a low-value business and can’t devote the time to plan and implement value-enhancements.

Depending on the circumstances, urgency, and financial expectations that motivate your exit, there are at least eight ways to sell your business. From passing the business down to the next generation or selling to employees to listing the business on the market, consider your options and what is right for you and your business.

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