Selling your company is a lot like selling your kid. This is something that you’ve created, nurtured since inception and watched grow into something beautiful. Now someone else has come along and taken that little baby away from you, and they’re not going to give it back. The hardest thing about selling your company is realizing that it’s no longer yours.
For many business owners, their companies are the focal point of their lives in their communities and are an essential part of their identities. When they sell their companies, a primary concern for many entrepreneurs is preserving the reputation, culture, and principles on which they built and operated the company. Will the new owner display the same values in managing the business? Can the company founder cope with the inevitable changes the new owner will make to the business?
An entrepreneur that wants to sell his company will always run into two types of buyers – financial buyers and strategic buyers.
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Financial buyers see buying a business as a way to generate income for themselves and their families. They look for businesses they can make an initial down payment for, and finance the remaining 50 to 80 percent of the purchase price.
Because they often borrow the money to purchase a business, their primary concern is the company’s ability to generate profits and positive cash flows in the future.
Strategic buyers view buying a company as part of a larger picture, a piece in a strategic puzzle that gives them an advantage such as access to a new, fast-growing market, a unique product or a new technological innovation. They are looking for companies that fit strategically with their existing businesses.
Selling a business involves developing a plan that maximizes the value of the business. Before selling his or her business, an entrepreneur must ask himself or herself some important questions:
- Do you want to walk away from your business completely or do you plan to stay on after the sale? Sometimes, business owners want to sell their companies but stay on to operate them. Most times, the founder sells the company outright, but the buyer pays the founder to stay on as a manager or as a consultant for a short time. This allows an entrepreneur to avoid concentrating his or her personal wealth in a single asset – the business – and to stay involved in managing the company he or she founded.
- If you want to stay on, how involved do you want to be in the running of the company? Entrepreneurs can also transfer their businesses to their children but still maintain control over the business by forming a family limited partnership. The entrepreneur takes the role of the general partner, and the children become limited partners in the business.
- How much can you realistically get from the business? Sometimes, business owners sell a majority interest in their companies to investors, competitors, suppliers, or large companies; retain a portion of the ownership themselves; and agree to stay on after sale as managers or consultants.
- Is this amount of money sufficient to maintain your desired lifestyle? Rather than sell this business to an outsider, should you be transferring ownership to your children or to your employees?
- Who are the professionals – stockbrokers, accountants, attorneys, tax consultants – you will need to help you close the sale successfully? A skilled tax adviser or financial planner can help business sellers legally minimize the various taxes take out of the proceeds of the sale.
- How do you expect the buyer to pay for the company? For owners wanting the security of a sales contract now but not wanting to step down from the company’s helm for several years, a two-step sale may be ideal. In this case, the buyer purchases the business in two phases – getting 20 to 70 percent today and agreeing to buy the remainder within a specific period. Until the final transaction takes place, the entrepreneur retains at least partial control of the company. This is known as a “two-step-sale”.
- Are you willing to finance at least some of the purchase price?
Sellers who have answered these fundamental questions are prepared to move forward with the sale of their companies. While selling a business might be a difficult decision for the seller, it is also a huge win for the buyer. How?
The business might already be situated in the best location; employees and suppliers are already established; equipment is installed and its productive capacity is known; inventory is in place and trade credit is established. The buyer can leverage these as well as the exposure, experience and expertise of the previous owner to hit the ground running.