CEO Advisor Newsletter September 2020
7 Methods to Sell or Cash Out of Your Business
An outright sale could be the simplest and best way to exit a business. This makes sense when a business owner’s family members have no interest in taking it over or when the owner does not have the desire or capital to take the company to the next level.There are several ways to sell your business. Regarding the structure of a sale, a business owner can 1) Sell the company’s Assets outright, or you can 2) Sell the stock in the company (or units if it is a limited-liability company). Stock sales benefit the seller, while Asset sales are more beneficial to the buyer, especially from a liability and tax standpoint.
1. Asset Sale. Asset sales involve transferring the company’s equipment, facilities, customers and customer contracts, as well as, intellectual property, such as trademarks and patents including intangibles like goodwill. Asset sales do not involve liabilities (unless specified by the buyer) and are generally protected against prior law suits facing the business.
2. Stock Sale. Stock sales involve buying the company itself along with the exposure to all of its legal issues and potential problems, as well as, the liabilities of the company. This is why most sales of small or mid-size, closely-held businesses are structured as Asset sales.
3. Partial or Full Sale to a Private Equity Firm. Companies with $10M or more in Revenue and $1.5M or more in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) can explore selling all or a large portion of their business to a professional Private Equity firm. This method comes with stipulations but has many advantages and potential upside. It also enables business owners to take a significant amount of cash upfront and still work as the CEO until the business is sold 100%. There are thousands of Private Equity firms in the United States, and CEO Advisor, Inc. has many relationships with PE firms as potential buyers of your business.
4. Management Buy Out. Selling the business to its management team is also a popular option for the right company. An owner might use this method when the company has a trusted, entrepreneurial management team that wants to carry on the business and this represents the best and most flexible process for the business owner. The primary advantage to this method is that the business owner doesn’t have to spend time trying to seeking out a buyer. The trade-off for a streamlined sale (assuming family issues don’t complicate the process) is that the purchase price may be lower than what an outside strategic buyer would pay.
5. ESOP. Another option is to sell the company to its employees through an employee stock-ownership plan (ESOP). Setting up these plans can be a complex undertaking, but they have their advantages. With an ESOP, the owner may want to remain with the company while slowly transitioning the business over time. It’s a way to reward employees with a long-term incentive for loyalty and hard work.
With this method, the company sets up an independent trust (the ESOP) that buys the owner’s stock at a price set by an independent valuation firm. The trust holds the stock for the employees for as long as they work for the company. When an employee leaves or retires, he/or she can sell the stock back to the company at fair market value. This can be a challenge as some business owners don’t like having a third party determine the value of their business as it may mean accepting a lower price than they could receive on the open market. Also, the company has to grow or have cash on hand to buy back employee shares when workers leave. This can divert cash from other business uses and can be a real cash drain if several employees leave the company in close proximity.
6. Recapitalization. Owners who want to sell their stake gradually, or who want to take some cash out of the business without giving up control, can recapitalize the business, or change its financial structure using instruments such as stock, preferred stock or debt. Suppose there is an outside buyer who is interested in acquiring the business, but doesn’t want to buy it outright upfront. The company could issue Preferred Stock and sell it to the potential buyer on a predetermined schedule. This gives the owner cash upfront, while the buyer has a chance to learn the company’s operations and line up financing before taking it over completely.
7. Debt Buy Out. If there is no readily available buyer and the business has healthy cash flow, the company might take on debt to buy out all or a portion of the owner’s stake. This is similar to a Management Buy Out, and must be evaluated carefully between you and your advisors.
There are many options for business owners who want to sell or cash out. The best method depends on the desire and health of the business and the owner. Understanding your options and getting the right advice from a team of experienced business professionals, such as an M&A Advisor, corporate/transaction attorney and a CPA/financial advisor will make it far easier to pursue the method that’s best for you.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc., for a free initial business consultation at (949) 629-2520, by mobile phone (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us today at www.CEOAdvisor.com for more information.