Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
But it’s the owner who prepares early, analyzes business decisions with long-term goals in sight, and structures the business appropriately that generally has the most lucrative and seamless transition.
Most know there are four possible business sale scenarios:
1. Nobody is interested;
2. An outside party is interested;
3. An employee or group of employees would like to make the purchase;
4. Family members are ready to take ownership.
Regardless of who buys your business, it can take several years for you to prepare the business for the exit you desire. Each buyer demands a different approach and requires customized actions to be prepared for price negotiations, proper buyout structures and minimized tax burdens.
The sale of your business will likely be the biggest financial transaction you will experience, so you want to do it right and find the appropriate professionals to guide you. Below are a few considerations depending on the buyer.
First, consider what happens if nobody is interested. Generally this is the least desirable solution, but definitely the easiest to accomplish. If your business has struggled, is in a declining business sector or is dependent upon you to generate all or most of its revenue, no potential buyer may be found. Your only course of action may be to collect your receivables, sell or dispose of your equipment and pay your liabilities.
Second, finding an outside party who is interested generally results in the largest and most lucrative transaction. An outside buyer may be an investor, an individual looking for a change in lifestyle, a competitor, or one of your customers or suppliers.
Influencing factors to an outside party include price, the company’s financial outlook, ease of financing, current market conditions and economic forecasts.
Factors to the seller include a fair price, a structure to minimize the tax burden, and an efficient sales process to transfer ownership quickly and maximize the amount of the purchase price that ends up in your pocket.
Outside buyers can be matched through intermediaries who confidentially match sellers to interested buyers. It is important to manage information disclosure. If the sales and communication process is not managed correctly it can cause key employees to jump ship, or suppliers and customers to seek other sources.
Third, if the right employee, or group of employees, is identified and mentored, selling to an inside party may increase the likelihood that the business will continue and thrive. Sale to an inside party generally starts by identifying key employees with an entrepreneurial drive. Inside buyers identify themselves as motivated individuals that inspire others, drive change, and exploit opportunities for new products, services and markets.
What inside buyers generally lack is the capacity to finance a large financial endeavor in one lump sum. When selling to an inside party, sellers should seek advice on finance options to make the purchase affordable for the buyer and provide enough wealth for the seller.
Mentoring your inside buyer helps to prepare staff and clients for the shift in authority. Good communication long before the transition occurs helps provide a smooth transition.
Consult with your tax adviser on mechanisms such as seller-financed loans and/or long-term compensation plans if outside financing is unavailable or limited. Flexibility on financing options can be the key attraction to closing the deal.
Fourth, selling to a family member often brings more complexity, both financially and emotionally. It’s important to weigh the benefits of keeping the company in the family vs. selling to an outside party. Family succession can be advantageous or a complete disaster; it is up to the seller to have a solid succession plan in place to guide the process.
Owners hope that individuals who are interested in buying the family business have demonstrated their leadership skills and possess the skills and competencies to run the business. What they may lack is the independent financial resources to finance the buyout.
For the seller, the most delicate area may be arriving at a sale price. However, there are financing options to consider such as the use of an installment sale if you are willing to accept payments over time; a buy-sell agreement that lets you arrange the terms today for a point in the future; or a sale through a gifting program to help reduce potential estate and income taxes.
Most successful family transitions begin with a long-term and well-executed succession plan. It is not uncommon for the seller to remain involved in the business working as a mentor, employee or “problem solver” until you feel the time is right to step away. Seek advice from your tax adviser on which type of financial and succession plan arrangement will work best for your family to meet your goals.
Regardless if the buyer is a new acquaintance, a trusted employee or a family member, a person who understands your business will recognize the value. In the end, your business is only worth what someone is willing to pay for it. Consult with trained professionals to begin preparing now to make the most out of your sale.
Ken George,
HLB Tautges Redpath:
651.426.7000
kg*****@***tr.com
www.hlbtr.com
