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May 8, 201812:27 PMOpen Mic

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6 ways to sell your company

(page 1 of 2)

When most business owners decide they want to sell their company they often realize that they don’t know what sale options are available to them. There are quite a few exit strategies available to owners of businesses of all sizes, and in this article we will explore the six most common options for selling a business and put them in the context of achieving a seller’s goals. Those options include:

  • Auctioned sale to a strategic buyer;
  • Auctioned sale to a financial buyer;
  • Management buyout;
  • ESOP;
  • Sale or gift to a family member; and
  • Non-auctioned strategic sale.

The best way to choose the appropriate exit strategy is to start by determining what financial and non-financial goals the owner wants to achieve from the sale. While specific goals for each business owner vary widely, we generalize them into just three categories: 1) maximizing sale price, 2) employee welfare, and 3) continuity.

For some sellers, financial goals are all that matter. They want to maximize the sale price for the business, and everything else is secondary. For others, the welfare of their employees after the sale outweighs the need to maximize the sale price. Still other sellers are most concerned with continuity and knowing that after the sale their company will keep its current name and continue to be run in the manner they managed it. After the business owner has thought through their goals for selling their company they will be ready to determine the best way to sell their company.

1. Auctioned sale to a strategic buyer

Goal: maximizing sale price

If achieving the highest sale price is the primary goal of the seller then an auctioned sale to a strategic buyer is one of the best routes to choose. By auctioned sale, I’m not referring to the type of auction that employs a fast-talking auctioneer with a gavel, but rather an auction process run by an investment-banking firm. In that type of auction process, the investment-banking firm prepares offering materials, introduces the opportunity to a carefully selected group of potential buyers, helps management give presentations to those buyers, and gives company tours to inform prospective buyers about the company.

When the investment-banking firm feels the interested parties are well informed, it will call for initial purchase offers to be submitted on a specific date. It then compares those offers, gives clarifying information to prospective buyers, and directs those prospective buyers where they need to improve their offers. The investment-banking firm then calls for another round of offers. This process may end after the second round of offers or continue for a couple more rounds until the firm is satisfied that the maximum sale price has been discovered with a buyer who is capable of completing the acquisition.

An auctioned sale to a strategic buyer will almost always maximize the sale price for a single transaction because it causes a competitive bidding process that uses market forces to discover the maximum sale price.

2. Auctioned sale to a financial buyer

Goal: maximizing sale price

An auctioned sale to a financial buyer (e.g., private equity firm or independent sponsor) follows the same process as the auctioned sale to a strategic buyer and is often combined with the auctioned sale to a strategic buyer when the owner’s intention is to sell 100% of the company. In that case, maximizing initial sale price is the primary consideration and will be achieved through this type of auction.

However, sometimes an owner realizes there are still significant growth opportunities for the company, but he does not have the resources or risk tolerance to pursue those opportunities on his own. In that case he may sell the company in a two-step process by selling 80–90% of the company to a financial buyer in the initial sale, helping the buyer realize those growth opportunities over the next three to five years, then selling the remaining 10–20% of the company in the second step when the financial buyer sells the company.

Pursuing this type of sale utilizes an auction process similar to the auctioned strategic buyer process, but in addition to trying to maximize the sale price for the initial 80–90% sale, the seller needs to determine which financial buyer will be the best partner to help them grow the company so they can maximize the value of the remaining 10–20% when they sell in the second step.

The initial sale through this process often doesn’t result in a sale price as high as a seller could get by selling to a strategic buyer, but with the right financial partner the initial and follow-on sales may result in a significantly higher combined sale price. This process is complicated but an investment banker with experience in this area and can guide companies through the process.

3. Management buyout

Goal: employee welfare

Management buyouts are one of the methods for selling a company that achieves the goal of maximizing employee welfare. Unfortunately, this option is often overlooked because the owner assumes the management team doesn’t have the money to acquire the company. That may be true, but management buyouts are highly financeable transactions with a great deal of interest from both private equity firms and banks.

If the owner of a business feels he has a strong management team in place that can run the business after the sale, he should discuss a sale with the team to determine if they would be interested in buying the company. If they are interested, he should encourage them to put together an offer. The team should work with a firm to help them value the company and put together an offer that is financeable. The owner of the company will surely negotiate certain points in the initial offer, but should keep in mind that the terms of the sale must be fair so the management team can secure the necessary acquisition financing. Once the negotiated offer has been accepted by the seller, the management team will work with its investment banker to find the equity and debt financing partners that are a good fit with the management team, offer the fewest changes to the deal already negotiated with the seller, and offers the management team the largest equity stake in the company.

A management buyout may not maximize the sale price to the owner, but it usually results in a fair valuation that has the additional benefit of allowing the owner to recognize the contribution his management team has made in his success and help to set them up for their own shot at creating some wealth.

(Continued)

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