By Maurie Cashman
The last scenario that we will look at during this series of articles is the sale to a third party. As discussed last week, it is important to select your successor early in the Ownership Transition Planning Process. Two weeks ago, we have discussed the advantages and disadvantages of transferring ownership to children and selling to other owners or employees.
A recent Citibank Small Business Pulse report found that 25 percent of small-business owners expect to sell their company to a competitor or third party as an eventual exit strategy.1 In a retirement situation, a sale to a third party too often becomes a bargain sale, and becomes necessary in many situations because owners fail to create a market for their stock through sale to family members, co-owners or employees. The only remaining option is liquidation.
The following are advantages to selling your business to a third party, as well the disadvantages associated with this type of ownership transition plan.
- If the business is properly prepared for sale, you can get cashed out. Many owners donâ€™t realize this. Unless you are a very small business, you should get the majority of your money from the business at closing. The fundamental advantage of the third-party sale is receiving immediate cash. This ensures that you attain your fundamental financial objectives and, perhaps, avoid risk as well.
- Treating all children equally, as we have discussed previously, is easier to achieve because you can eventually just divide the money among them on an equal basis without having to worry about who is going to run the business, etc.
- You have the ability to receive substantially more cash than your CPA or valuation specialist anticipated because the market is “hot.”
- The personality and culture of your business may undergo a significant change. The buyer is buying the business because he is convinced that the company can be improved through change. Maintaining the culture of the business is generally best achieved by selling to someone other than an outside third party.
- If you do not receive the bulk of the purchase price in cash at closing, your risk can be substantial. The best way to avoid this risk is to get all the money you will need at closing. However, a point to consider is that sellers can receive a significantly higher price if they are willing to offer partial financing to a qualified buyer, reducing the equity that must be brought to the table.
Through proper planning, you typically can minimize the disadvantages associated with a sale to a third party and leverage the advantages associated with this type of ownership transition path. As we have discussed in the past few weeks, there are advantages and disadvantages of transferring the business to each potential successor: family member(s), co-owners, employees and outside third parties. Each method contains not only related characteristics, but also substantial differences. We have provided you with a good snapshot of what each scenario has to offer so that you can have a basic understanding of the common potential ownership transition paths. It is important to note that each transition method has many detailed components and circumstances that you should discuss with your advisors before proceeding down any of the discussed ownership transition paths.