As a business owner, it’s crucial to consider whether you trust your current management team or your children to assume ownership and effectively run the company. Alternatively, you might consider selling your ownership to a larger strategic company within the industry or to a private equity firm.
Early preparation can ease concerns and provide peace of mind when considering your plans over the next 2, 5, or 10 years. Rushing to exit your business can result in lost value if buyers perceive the business as unprepared. Therefore, early planning can significantly reduce stress and enhance the appeal of your business.
It’s essential that you feel comfortable with the path you choose, as it will shape your legacy after your exit. Allow yourself enough time to make the best choice possible. This preparation ensures that when the time comes, you’ll be well-prepared and in the right mindset to smoothly transition into the next phase of your life.
External Sales Dynamics: Amplifying Your Company’s Appeal
An external sale offers the opportunity to secure the highest price and provides your business with enhanced financial resources to expand beyond its current capabilities. Large strategic or private equity buyers have greater access to capital, enabling investments that may currently be out of reach for your business. External buyers often drive-up prices through competitive bidding.
Investment bankers facilitate buyer outreach, negotiate prices, and manage aspects of due diligence to ensure a smooth transaction. If your priority is to exit completely and realize immediate cash benefits from the transaction, an external acquisition is likely the preferred choice for you.
External buyers may seek to acquire your business to eliminate competition, leverage shared resources, or expand their market presence, factors that can significantly influence the price they are willing to offer. The attractiveness of your industry often dictates offers, which typically range from 4x to 9x multiples of your latest EBITDA. External sales rely on comparative analysis, examining recent mergers, acquisitions, and industry standards to estimate market value, typically resulting in an EBITDA multiple that reflects current market conditions.
A third party that recognizes synergistic value will typically offer a higher price, anticipating quicker and greater returns on their investment compared to a party that lacks synergies. External buyers can also spur competitive offers, potentially resulting in a significant portion of the transaction being paid in cash at closing, often up to 100%.
When deciding on the type of sale for your business, several factors come into play that may influence your decision between internal and external transactions. Your priorities and the readiness of your current team or successors are crucial factors to consider in making a well-informed choice.
The goal is to strategically position your company by highlighting strengths and addressing any weaknesses that could reduce attractiveness to potential buyers. For example, gradually transferring hands-on responsibilities from the business owner to management over several years is an effective enhancement strategy that resonates positively with buyers.
Internal Transitions: Nurturing Your Company’s Next Chapter
Consider asking these critical questions: Does my current management team aspire to take on ownership responsibilities, or would they prefer focusing on day-to-day operations while another entity assumes ownership? Does our management team have the necessary longevity and commitment to drive business growth? If transitioning to the next generation of the family, could this potentially lead to family tension regarding the ongoing success of the company?
Selling internally to your children or management team offers distinct advantages: you already know and have a relationship with the buyer. They are likely familiar with the company culture and well-equipped to preserve and enhance it post-transition, leading to a smoother changeover. Additionally, the sale process is typically quicker compared to an external sale, where investment bankers need time to generate interest and attract potential buyers.
The Big Picture: Connecting the Threads
The Bonadio Group’s Corporate Finance team, which includes investment banking, transaction advisory, and business valuation services, is committed to assisting business owners in discovering their business’s true value and positioning it for future success. Business valuation and investment banking professionals can provide insights into the implications of external versus internal sales and offer clarity on how your business and personal life may evolve after exiting. Want to learn more? Check out the below articles written by our team lead and Partner, Jeff Lewis, for further insights:
- What’s the Difference Between a Business Valuation and an M&A Assessment?
- Three Top Considerations for Preparing for the Sale of Your Business
- The Top 5 Drivers of Company Valuation
Additionally, don’t hesitate to explore our middle-market resource article page for further insights on a variety of topics crucial for business planning. If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
