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Understanding the options for selling your business

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You’ve worked hard, built a successful business, and now you’re thinking about selling. Depending on your company’s size, the industry you’re in and your personal objectives, there are several business transition options for you to consider.

Here are the pros and cons of each.

1. Sale to your management team

Often referred to as a management buyout, or MBO, this is where you divest all or a portion of the company to the management team.

Benefits

  • The business transition risk is significantly reduced because your employees typically have deep knowledge and experience in operating your business. Therefore, they won’t have to follow a steep learning curve, as a new buyer would, after you exit. This reduces the impact on operations, customers and business culture.
  • An MBO can offer greater flexibility if you want to sell only a portion of the business. For example, you may wish to sell the shares of only one or two partners to managers.
  • A sale to your management team can allow you to achieve the altruistic objective of seeing your employees benefit from the success you’ve created together.

Drawbacks

  • Management teams often have limited access to capital and require financial partners (such as banks) to support the transition. This can result in a lower purchase price, increased debt and more vendor financing from you.
  • Your managers may not share your interest in running the business or your capacity to do so.
  • This strategy requires a thorough succession plan, which takes time to develop and implement.

2. Sale to a financial buyer

This can be broadly defined as a sale to a buyer who is not already operating in your industry. This type of buyer, which includes private equity funds, is looking to increase the value of the business to eventually sell it for a substantial profit.

Benefits

  • These buyers are typically well capitalized and sophisticated, and as a result are often able to pay higher prices than MBOs.
  • They often also have access to excellent human resources, meaning they’re able to build and/or support management teams, enhance corporate governance and add value to the business in other ways.

Drawbacks

  • Most financial buyers want to own a business for three to seven years, before they resell it to achieve their financial objectives. To achieve this goal, they must create value through a combination of paying back debt, growing the business and improving its performance. This may result in substantial changes to the business’s operations, employees, culture and identity.
  • Sellers are often required to stay on with the business for several years after the sale to assist the new owners. This may not fit with your plans for your future.

3. Sale to a strategic buyer

These buyers can be broadly defined as larger players in your industry who are looking to buy smaller firms to enhance their current operations, products or market presence.

Benefits

  • These buyers typically have resources to pay the highest value for your business because they have the greatest access to capital and can leverage synergies within their existing business.

Drawbacks

  • There are fewer of these strategic buyers and as a result their acquisition criteria are more stringent. For example, they will often be looking for larger businesses (revenue, geographic reach, diversity of product/service offerings), and a higher standard of professional management (quality of the team, processes, financial reporting, etc.).
  • Depending on the size of the acquirer, your company may be “swallowed” into a larger organization, which may result in loss of brand identity, employees, locations etc.

4. Partial recapitalization

Previously only available to larger firms, this is becoming an emerging option for some small and mid-sized companies with strong businesses. In its simplest form, a partial recapitalization allows owners to either sell a minority equity interest in their company, or using debt, repay shareholder loans, issue dividends or redeem shares to withdraw capital from the company.

Benefits

  • Allows a shareholder or group of shareholders to share some of the financial risks of the company with another partner, without relinquishing control.
  • Founders can continue to operate and grow their business and not prematurely sell to create liquidity. This can be advantageous in increasing valuation, aligning the sale of the business to stronger market conditions and enabling business owners to consider strategic options they had resisted previously because of their personal risk tolerance.

Drawbacks

  • Your company must be on strong financial footing in order to pursue this strategy and have reasonable leverage and sufficient retained equity that can be distributed to the owners.
  • You will likely realize a smaller amount of liquidity than the previous options, however you are often able to retain full or significant equity interest in your company, which you can then sell later and realize a higher value.
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