Ten Alternatives When Contemplating “Selling Your Business”
1. Sell to Strategic (Industry) Buyer:
Strategic buyers usually pay the highest price but in return may restructure your company.
2. Sell to a Financial Buyer (usually done via a leveraged buyout (LBO)):
Financial buyers can be private equity firms, groups of investors or another entrepreneur who is interested in buying your company. Debt is used in the financing of the deal and in smaller firms the buyer is expected to take back a note to support the deal and assist in the financing.
3. Management Buyout (MBO):
Family members and/or a group of current managers raise capital and arrange debt to acquire all or part of your company. Challenges include the ability of the group to raise the equity level required by the banks and the right mix of managers to acquire the firm.
4. Employee Stock Ownership Program (ESOP):
This regulated alternative allows the business owner to sell all or part of the company to a trust which generally borrows money to effect the transaction. The proceeds to the owner are tax sheltered. The challenges are the need for annual valuation of the firm and now a larger number of “shareholders.”
5. Leveraged Recapitalization:
This alternative is only relevant for companies which have strong EBITDA and can borrow additional funds from lending institutions. The company borrows money and buys back shares from the owner (akin to a share buyback program offered by public companies from time to time). Disadvantage is additional leverage now on the balance sheet.
6. Sell Part of the Company to a Foreign Investor:
With the strength of overseas economies and the strong performance of its industries, we see increased interest in foreign groups buying minority or majority shares in US firms. Usually the investors interested are firms or families linked to your supply or customer chain and industry.
7. ‘Private IPO’ or Private Placement of Equity:
There are investment firms in the US which specialize in buying significant stakes in successful private or family owned firms. They link their return to the achievement of financial goals and work in concert with the other owners to grow the company with an eye toward selling the firm at a later date.
8. Restructure the Company to Generate Liquidity to Buy Back Shares:
Many business owners feel strongly that diluting their ownership is the last alternative and thus they dig for ways to generate liquidity through plant consolidation, asset sales or other means. They then use the additional liquidity to buy back shares from the owner or owners.
9. Estate Planning Transition Plans:
If business owners plan ahead there are a number of trust and estate alternatives for the gradual transfer of the firm to new shareholders (usually family members). It is imperative that business owners spend time with skilled professionals to develop a long term plan for this to succeed.
10. Take the Company Public (IPO):
Fewer alternatives are available in the public markets for middle-market firms to go public. The benefit is increased liquidity for the remaining shares and cash for the shares sold. Firms should evaluate this alternative carefully and be sure the market can support the stock and the future performance and growth is projected to be strong.