Competitor Down the Road Not Your Only Option

Many business owners have preconceived notions about who will buy their business or whether it’s even salable at all. A lot of owners think their most likely buyer option is the competitor down the street. Maybe that was true, once upon a time. But the M&A world has changed dramatically—and continues to evolve.

Today, when we talk about selling your business, we’re really talking about a wide breadth of options. This is not an all or nothing scenario—you can sell all of the business, or just some of it. You can sell it all but stay on as an employee or a consultant. You can sell to a private equity firm and to your kids at the same time. There are so many options.

And your local competitors are usually not the only buyers at the table. According to the Market Pulse Report sponsored by IBBA and the M&A Source, if your business is valued around $2 million, there’s a 30% chance your buyer will come from more than 100 miles away. And if you have a $5 million business, it’s about 75% likely your buyer will come from outside that radius.

How well do you understand the exit options available in today’s market? Here’s an overview of seven common exit strategies and the pros and cons of each:

Sell 100% of your business, 3rd party sale

Pros: You can typically sell for a higher value in a competitive auction-like environment. And you get to move on to your next chapter without any business responsibilities hanging over your head after you transition out post sale. Con: It can be emotionally challenging to let go of something you’ve invested so much of your life in.

Sell the majority of your business/recap

Some owners sell but retain an equity stake in the business. Pros: Allows you to take some chips off the table and diversify your assets. By keeping a share of the business, you get an opportunity to stay involved and help a new owner grow. Later, you could gain even higher returns when the business sells again. Cons: You may struggle with not being the chief decision-maker anymore.

Sell to your children

Pros: A business transfer to children or other family members is a great way to ensure your culture and legacy remain intact. You get to share a valuable asset with people you love and will probably have ongoing opportunities to stay involved. Cons: Your children may not want the business and may feel pressured to take on something that they have no real interest in. Selling to your kids typically involves a gradual payout, oftentimes over 7-10 years, meaning tension and loss if business performance declines.

Management buyout

Pros: Selling to leadership has similar advantages as selling to family. You share a valuable asset with people you’ve come to know and respect, and you know the business will be in the hands of people you trust. Cons: Here too, the risks are the same. Your management team may struggle to raise enough funds. These deals often require a high level of seller financing, meaning you could be deferring your total compensation for 7-10 years. And if business performance declines, you might not get paid.

Divestiture

Selling off a product line or division can diversify your investments and alleviate some of the pressures of ownership. Pros: You maintain strategic focus on your core business. Cons: You may have to make talent adjustments if employees were working for multiple business units. Plus, your remaining business will have to absorb fixed costs that were previously shared.

Shutdown

Pros: By selling off your assets, you can eliminate debt and put a cash reserve in the bank. This is the simplest option and can be executed immediately, without waiting. Cons: Liquidating your assets may generate far less value than you could have received for an ongoing operation. This option also results losses of both jobs and legacy and residual impacts on the community.

Death or disability

Pros: None. Cons: Leaves your grieving family with significant burdens and responsibilities. Often results in a significant decline in value before the business is sold.

Advance planning can make or break a business transition. Think about how you might want to exit your business someday, then talk to an advisor about how to make that happen. An M&A advisor can provide an accurate business valuation, show you how to increase that value, and help you shape a strategy that best fits your overall goals.

By Scott Bushkie

Scott Bushkie is Managing Partner and Founder of DealCoach.

With more than 20 years in the Mergers and Acquisitions (M&A) industry, Scott is a recognized leader in the field, providing exit strategies, business valuations, and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers. Follow DealCoach on Linkedin

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About DealCoach

DealCoach is headquartered in Green Bay Wisconsin with an office in Milwaukee Wisconsin and helps customers find out how much their business is worth with online business valuations and advisory services. Our business valuations also known as an Estimate of Value (EOV), help prepare buyers and sellers for the sale. DealCoach also helps business owners grow value with a Business and Market Analysis and plan for retirement, estate & financial planning, benchmarking, and strategic planning. DealCoach servers and has provided business valuations for businesses located in the United States and Canada.

We are here to tell you what you need to hear in order to make a well-informed decision with most likely the largest financial transaction of your life. Our team has over two decades of M&A experience, and we have been completing Estimates of Value for our clients for over nine years.