Selling to an Outside Party

A third-party (outside) buyer refers to an individual or entity that is not currently involved in the business and is seeking to purchase it. Business owners may choose to sell to a third-party buyer instead of an internal buyer, such as a family member, employee, or partner, for various reasons. Often, an external buyer offers more capital, which can result in a higher sale price. Third-party buyers may also be more motivated to make the sale happen quickly and efficiently, especially if they are looking to expand their portfolio or enter a new market. Additionally, selling to an external buyer allows the business owner to fully step away from the company without the complexities or emotional ties that might arise in an internal sale. This can be an attractive option when the owner is seeking to exit completely and pursue new opportunities without lingering involvement.

There are generally three external buyer options: Individual/Strategic, Merger & Acquisition, and IPO.

Sale to a Individual or Strategic Buyer

This option is ideal for owners seeking to exit fully and may involve selling the entire business or specific assets.

Pros:

• Higher Sale Price Potential: Both individual and strategic buyers may offer competitive prices, though strategic buyers often pay more due to synergies they anticipate from the acquisition. Individual buyers may still offer fair prices, especially if they are personally invested in the business or its future.
• Flexibility in Deal Structure: Individual buyers often offer more flexible deal terms, such as creative financing or payment schedules. Strategic buyers, while typically less flexible, may still offer favourable terms, especially if the acquisition aligns with their long-term strategy.
• Smooth Transition Options: An individual buyer may be more willing to work closely with the seller during the transition and may even allow the seller to remain involved for a period. Strategic buyers may also offer a smooth transition, though this can vary depending on the integration process.

Cons:

• Privacy: Sellers soliciting interest from strategic buyers disclose information that may be strategically sensitive, not the least of which is that the business is for sale. This can put company at risk, especially if the preliminary deals don’t close.
• Cultural and Operational Changes: Both individual and strategic buyers may make changes to the company’s culture or operations. However, strategic buyers often implement larger-scale changes that may be more disruptive, especially if they integrate the business into their existing operations.
• Potential Layoffs or Restructuring: Strategic buyers may consolidate operations or eliminate redundancies, potentially leading to layoffs or significant restructuring. Individual buyers, although less likely to make major layoffs, may still restructure to fit their vision for the business.

Sale to a Private Equity Firm

Private equity (PE) firms, also called Financial Buyers, gather capital from affluent individuals and institutional investors to purchase and expand businesses. Rather than directly running the companies they acquire, PE firms typically rely on the existing management teams and frequently collaborate with strategic buyers or consolidators to drive growth.

Pros:

• Partial Sale: PE groups rarely acquire 100% of ownership. Instead, they partner with existing shareholders and acquire majority control, allowing businesses owners and management teams to share in future growth. This is deal for owners who want to stay involved.
• Future Profits: the owner often has the ability to pull out some wealth that has been created, while continuing to drive the future growth of the businesses. 
• Capital infusion: PE groups have substantial financial resources to facilitate acquisitions. 

Cons:

• Lower selling price: often offer lower purchase prices, as they focus on minimizing risk and rely on detailed financial models to ensure a return on investment.
• Time horizon: deal often involves the owner staying on for an extended transition period until the next sale or liquidity event. This may not be ideal for owners who are looking for a quicker, complete exit.

Merger and Acquisition (M&A)

If the business is larger or looking to expand, the owner may consider merging with another company or being acquired by a larger entity. This often involves more complex negotiations but can provide access to greater resources and growth opportunities.

Pros:

• Maximized Sale Price: External buyers, especially strategic buyers, may be willing to pay a premium to acquire the business for growth or synergies.
• Clean Exit: Selling to a third party allows the business owner to fully exit the company and move on to new ventures or retirement.
• Capital for the Next Stage: The sale provides immediate liquidity, allowing the owner to diversify their investments or fund new opportunities.

Cons:

• Complexity: M&A transactions can be complicated and involve negotiations, legal, and financial considerations that require expert assistance.
• Cultural Integration Issues: Merging with another company may create challenges in integrating company cultures, systems, and employees.
• Complex Process: Negotiating and closing a sale with a third-party buyer can be time-consuming, costly, and involve extensive due diligence.

Initial Public Offering (IPO)

Taking your business public by offering shares on the stock market can be a lucrative exit strategy.

Pros:

• Access to Capital: Going public can raise significant capital, which can be used for expansion, debt reduction, or strategic investments.
• Increased Public Profile: An IPO can raise the company’s visibility and prestige, enhancing its reputation and market presence.
• Liquidity: Owners can sell shares to the public, providing an exit strategy while maintaining some ownership in the company.

Cons:

• High Costs: The IPO process is expensive, involving underwriting fees, legal expenses, and regulatory compliance costs.
• Regulatory Scrutiny: Public companies are subject to strict reporting and compliance requirements, which can be time-consuming and costly to maintain.
• Loss of Control: Going public means giving up partial control of the company, as shareholders will now have a say in major decisions.

Selling to an internal buyer

A business owner may choose to sell to an internal buyer, such as a family member, employee, or business partner, for several reasons. One key motivation is to ensure the continuity and preservation of the company’s legacy and culture. Selling to someone already familiar with the business allows for a smoother transition, as the internal buyer often understands the operations, values, and relationships within the company. Additionally, internal buyers may offer a sense of trust and stability, which can be important for both the owner and other stakeholders. Selling internally can also allow the owner to maintain some control or involvement in the business, either by retaining a role or staying involved in a consultative capacity. Furthermore, internal sales may involve fewer complexities in negotiations and potentially lower transaction costs compared to selling to an external buyer.

There are a few internal buyers available: Management Team, Employee Ownerships, or Sale to Family.

Sale to Your Management Team

This approach, often called a management buyout (MBO), involves selling your business to the people who already know it inside and out—your management team.

Pros:

• Continuity and familiarity: The team understands the business’s operations, culture, and customers, ensuring a seamless transition.
• Confidentiality: Since the buyers are internal, there’s less exposure of sensitive business information compared to marketing the business to external buyers or even employees.
• Easier negotiation: Since the management team knows the business, the due diligence and transition process can be smoother.

Cons:

• Financing challenges: Management teams may lack the capital to buy the business outright, necessitating external financing or seller financing.
• Limited market value: Selling to insiders may not fetch the highest sale price compared to external buyers.
• Potential tensions: Transitioning from employer to peer can create challenges in relationships.
  

Employee Ownership Trust (EOT)

An EOT involves selling your business to your employees via a trust structure, ensuring broad ownership among your workforce.

Pros:

• Employee engagement: Employees feel a stronger connection to the company’s success, fostering motivation and loyalty.
• Preservation of culture: The business retains its identity and values under employee ownership.
• Tax benefits: There are significant tax incentives for both the seller and employees.

Cons:

• Complex Setup: Establishing an EOT requires time, legal expertise, and careful planning.
• Gradual Payout: Sellers may receive proceeds over time, which could be a drawback if you need immediate liquidity.
• Limited Resources: Employees may face challenges in raising capital for business growth.

Learn more about EOTs here

Sale to a Family Member

This option involves transferring ownership to a relative, ensuring the business stays within the family.

Pros:

• Preservation of Legacy: Selling to a family member allows the business to remain within the family, preserving the business’s legacy and values.
• Emotional Satisfaction: It can be personally rewarding to see a family member continue the business, especially if there is a desire to keep the family’s entrepreneurial spirit alive.
• Smoother Transition: Family members typically have a strong understanding of the business and its culture, leading to a more seamless transition.

Cons:

• Family Conflicts: Personal relationships can complicate business decisions, and disagreements may arise over how to run the business, leading to tension.
• Limited Capital: Family members may lack the financial resources to purchase the business at market value, potentially resulting in a lower sale price.
• Competency Gaps: While the intention to keep the business within the family is admirable, an unqualified successor could lead to poor decision-making, operational inefficiencies, or even a decline in the business’s performance.

Choosing the right path to sell your business depends on your goals, priorities, and vision for the future. Whether you prioritize maximizing value, preserving your legacy, or empowering your employees, each option offers a unique opportunity to transition your business successfully. By carefully weighing the pros and cons of each route, you can make an informed decision that aligns with your aspirations and ensures a bright future for your enterprise