What Buyer Is Right for Your Business? Evaluating Internal and External Sales Options
By: Josh Huseman, Vice President, Business Owner Advisory Services
It may seem incomprehensible to think about selling a business while it is thriving, but eventually every owner reaches the point where they are ready to exit. Planning your ideal departure can begin with a few simple considerations.
Business sales usually fall into two categories: internal and external. In general, internal sales transition control of the business to a person already embedded in the company, and external sales are an outright sale initiating a change in control and ownership to an outside party.
Business owners who think ahead have more possibilities than they may realize. Here are a few insights to help you begin planning.
Should You Consider an Internal Sale of Your Business?
Internal sales provide an excellent opportunity to maintain company culture and, especially in the case of family-owned businesses, can be the preferred scenario for an outgoing business owner. Owners contemplating this exit type are often concerned with employee security, customer relationships and community connections. These are important issues to those who have built a long-standing business, and to be successful, there are several things to consider:
- Individual Financial Capacity: Outgoing business owners may have a strong desire for a specific employee to lead the company going forward. In this case, the financial requirements can be substantial. If the owner does not share his or her intent early, the key employee may lack the time needed to prepare financially to assume ownership, leading to a failed transition.
- Company Financial Capacity: Often, internal buyers need to use future cash flow from their ownership interest to fund stock purchases. If the company struggles to demonstrate predictable cash flow and profitability, it may be difficult to complete an internal transition.
- Management Capacity: Businesses are often highly dependent upon the day-to-day involvement of business owners. Whether the business is reliant on the owner for sales, vendor relationships, leadership or other responsibilities, a high level of participation could make it difficult to transition the company to an internal source. Early preparation is essential here, giving the owner time to develop talent management plans and prepare future owners to take on those responsibilities.
When given early thought and preparation, an internal sale can ensure your life work is transitioned to highly motived owners who will continue your professional legacy.
The External Business Sale and Beyond
External sales introduce an extra level of complexity, often requiring more forethought than an internal sale. That’s why we developed a Prepared Exit process to help owners prepare for what might be their most significant professional transition. This also can be a very emotional process, and we have found it helpful to give thought to six common considerations before a potential deal is presented.
- Sale Proceeds at Closing: It’s important for you to understand how much of the sale needs to be paid out in cash immediately and over time; or how much is held back in escrow; or if you will consider providing financing directly to the buyer, and what those terms may include.
- Employee Culture and Community: You’ve built a strong enterprise, so it’s no surprise that you want to see your legacy continue to survive and thrive. To ensure continued prosperity, as well as company culture, it’s important to consider what is acceptable to you in terms of employee retention, local economic impact and overall cultural changes, as you sell to an outside owner.
- Ongoing Operations: Business owners often assume that a buyer will want to continue their brand, but what if the buyer has different expectations? Before you sell, think about whether you want your business name to continue and evaluate potential buyers on their demonstrated commitment to execute on this intention.
- Speed of Transition: When you’re ready to retire, how quickly will you want to leave the business? Will you be ready to leave on the day of closing, or are you willing to stick around to support the transition?
- Value Received: Setting a sale price for your business is a complicated process. What your company may bring on an open market can easily be diminished by the terms and conditions of the agreement. That’s why it’s important to decide ahead of time how much you are willing to sacrifice to meet expectations in the areas listed above. Sometimes owners will accept less if the buyers make other non-financial representations, such as retaining employees or honoring commitments to local communities.
- Tax Efficiency: Generally speaking, sellers have an option of a stock sale or an asset sale. Both bring about different consequences and can impact the after-tax proceeds. Being clear about this up front and determining net proceeds estimate should be done early in the process.
Whether you are considering an internal sale, an external sale or still exploring your options, it’s important to take control of your exit. Planning ahead allows you to choose the option that is best for you and your business.
About the Author
Josh is the Vice President of Business Owner Advisory Services. Josh is motivated by a strong desire to see business owners impact the world through their core values and entrepreneurial spirit. He is particularly intrigued by the unique opportunities and challenges that come with family-owned businesses, and he works hard to help them realize their full potential.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.