I don’t know if it is a sign of a turning economy, but recently I have had a lot of people looking into selling their business. I have really taken the view that they wanted to get out a long time ago, but the market would not support them at the numbers that they wanted.
There is a lot out there in print about how to sell. You can find a bunch at any good book store. You can also find good material in the Wall Street Journal. So don’t start this without doing your research.
Selling your business isn’t easy, but you have more options than you may realize. Taking the wrong approach could have serious financial consequences for both the entrepreneur and the company. Pick the one that is the right fit for your business and you.
An outright sale is the easiest way to exit your business. This way makes sense if your family has no interest in taking it over or when you can’t figure out how to take the company to the next level. Sometimes this is also the simplest exit strategy if you cannot meet challenges that may have arisen.
There are two ways to cash out: you can sell the company’s assets outright, or you can sell your stock in the company (or interest units if it is a limited-liability company). Stock sales tend to benefit the seller, while asset sales are more beneficial to the buyer.
Asset buyers are getting your company’s physical equipment, facilities and customers, as well as intangibles such as trademarks and goodwill. These buyers are then protected against prior claims against your old business. For example, you would most likely be responsible if an environmental claim were made against your former property or if an employee hired on your watch filed some sort of lawsuit.
Stock purchasers, in contrast, are buying your company itself. That then makes them exposed to all of its potential problems. This is why most sales of small, closely-held businesses are structured as asset sales.
Selling the business to its managers is also a popular option. You might go this route when your company has a trusted, entrepreneurial management team that wants to carry on the business. The biggest advantage of this strategy is that you don’t have to spend time trying to charm a buyer. The trade-off for an easier sale is that the price may be lower than what an outsider would pay.
Another option is to sell your company to its employees through an employee stock-ownership plan (ESOP). Setting up these plans can be a complex undertaking. They do have their advantages, however. For example, you can remain with your company while taking money out of it. And you can reward employees with a long-term incentive program for loyalty and hard work.
To create an ESOP, you set up an independent trust (the ESOP) that buys your stock at a price set by an independent evaluator. The trust holds the stock for the employees for as long as they work for your company. When an employee leaves or retires, he can sell the stock back to the company at fair market value.
Some business owners don’t like having to let a third party determine the value of the company, believing that it might mean accepting a lower price than they would get on the open market. Also, your company has to have cash on hand to buy back employee shares when workers leave. This can divert cash from other business uses and can be a real drain if several employees leave in close succession.
If you want to sell your stake gradually, or want to take some cash out of the business without giving up control, you can recapitalize your business, or change your financial structure using instruments such as stock, preferred stock or debt. For example, suppose there is an outside buyer who’s interested in your business but doesn’t want to buy it outright just yet. Your company might issue preferred stock and sell it to the potential buyer. This gives you a cash infusion while the buyer has a chance to become familiar with your company’s operations before taking it over outright.
Or if there’s no such buyer and the business has healthy cash flow, your company might take on debt to buy all or a portion of your stake. While there are many options for you to cash out, the best way depends on the nature and health of your business and your intentions to stay with the company or move on. Understanding all of the options, and getting good advice from experienced business professionals, can make it easier to pursue the route that’s best for you.
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Otherwise, as always, good luck and good hunting.
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