(Part 3 of 6)
In last month’s article on succession planning, we talked about selecting the right leadership team for a business ownership transition. Now it’s time to discuss the actual sale transaction: determining the liquidity the owner can expect to receive and what form it might take.
The first thing to determine is what type of sale it will be: a total outright transaction for the entire enterprise or a portion of the equity. Typically an outright sale occurs when the owner(s) is looking to retire or start an entirely new venture. If they want to stay involved, but move out of the hot seat of leadership, they might choose to sell only a part of their equity.
The next question is to whom the business will be sold. While sale to an outside party is common, other possibilities include a buyout by the current management, merger with another company, acquisition by an Employee Stock Ownership Plan (ESOP) or a similar vehicle in which the employees become the owners.
In my experience with many business exits, I find that the objectives of the selling shareholder — i.e., what they would like to see happen to the business after their departure — will define what type of transaction the “sale” evolves into. Many business owners who worked hard to build their enterprises feel a responsibility to the company’s legacy and to their employees, and that weighs heavily into their exiting objectives.
Part of any successful exit plan it to gather a team of advisors who will help the seller facilitate the transaction in a way that meshes with their objectives. This team can include legal counsel, accountants, a business broker who finds a buyer, insurance professionals and others necessary to properly effect the transition in an efficient manner and manage the risk involved.
Part of the advisors’ job is to manage the expectations of the seller, to help develop terms and conditions for the transaction and then be flexible in negotiating a transaction favorable to the seller. The most important things are getting a fair price for the value of the company and formulating a plan for the sale proceeds that meets the seller’s requirements.
As a rule, 100 percent cash sales are very rare. So that means the seller is probably going to carry some paper on the transaction. It’s important to establish terms of payment, time frame — it’s better to keep it short — and the interest rate. The seller also needs to consult with a tax advisor to understand the tax consequences of a sale to one’s personal financial situation.
Also, a seller should be aware that it is common for a buyer to insist upon a non-compete clause, so the seller can’t operate in the same market and/or industry for a specified term. After all, from the buyer’s position it makes little sense to pay a fair price for a company if the seller takes their expertise and business relationships to set up a new competing shop across the street!
Gathering the correct documents and executing them can be a time-consuming process that can even put the transaction at risk. Once the Letter Of Intent is signed, the seller should establish a tight timeline for consummation of the sale so distractions and delays don’t endanger the deal.
Finally, in my experience the most successful transactions are those in which the seller and buyer personally like each other. When they can communicate well and have a shared base of trust and mutual respect, differences and misunderstandings can often be worked out without sinking the sale. In one case that I was a party to, the lawyers reached a stalemate over terms, and the CEOs of the buying and selling companies resolved the matter with a simple phone call.
In next month’s succession article, we’ll talk about avoiding the Post-Sale Blues.
If we can assist you with any succession planning and business exit planning issues, please call Jason Thompson at (317) 608-6694 or email [email protected].