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It
seems everyone assumes that buyers of small businesses come from a pool of
"outsiders," more commonly referred to as third-parties. This belief seems
to hold firm despite the dismal odds: 72% of owners cannot find a buyer
and when they do, 70% fail to successfully complete the deal. Given these
horrible odds, you would think that there would be more conversations
about selling to "insiders" instead of outsiders. Insiders are employees
of the business, and could include partners, a management group, a child
of the owner, or a combination of the three.
Outsiders, though they
come in a variety of forms, generally have one thing in common: they are
sophisticated and experienced shoppers. A sample list of third-party
buyers might look something like this:
- equity firms
- privately held regional and national companies
- public companies
- individuals
These buyers tend to take the cream off the top,
leaving the majority of sellers with seriously unmet
expectations.
If you are in the majority -- an owner of a terrific
business to which you have given the shirt off of your back over the years
with no buyer in sight -- you may be looking in the wrong place for your
buyer. Your best prospect could be sitting in the office next to you. For
many of you it is really hard to imagine your child or another employee
taking on the responsibility that comes with owning your business. Before
you dismiss this option, you may first want to think hard about your other
options.
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The Right Match -- Making an Insider an Owner |
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If the groundwork has not already been laid to transform an insider
into an owner, you have your work cut out for you. Selling to an insider
takes time and some special planning; it won't be easy. Based on national
statistics, which are confirmed by our experience, the typical exit
planning process will take roughly 3 to 6 years. If you are just beginning
to think about grooming an insider, give yourself plenty of time to line
things up.
Although it won't be easy and will take a lot of time,
selling to an insider can lead to the best result for everyone. The most
seemingly impossible circumstances can be turned around. If you are like
most owners, a successful exit means more to you than money. If you don't
believe this, try selling your business to someone you don't like or
trust. You won't be able to; even if you are getting your price. Business
owners as a group are passionate people who care deeply about many things:
customers, vendors, family, community and employees. Their business has
served as a means of delivering value in many forms to many people. We
have found that a successful exit means, among other things, leaving the
business with a hope and a future so it can continue to bring value to its
many constituents. With patience, careful planning and the right team of
professionals, a transition to an insider can be significantly less
jarring than a sale to an outsider, and is much more likely to leave the
founder's imprint intact. The culture you have built and the people you
care about are far more likely to continue with the business. In short, a
sale to an insider, done correctly, is much more likely to truly sustain
the owner's legacy.
So, why are there so few sales to insiders?
First of all, insiders have no money. Why? Because they have been working
for you! This is generally the case even if the business is financially
successful. At best, the likely successor has been rewarded from the
firm's success with some form of equity in the company, making his dilemma
like yours - his or her wealth is illiquid. So, who pays for the business?
It's actually quite straightforward. The successor-employee pays for the
business from the future cash flow from the business in yearly
installments after the business interests have been transferred. With a
strong business and a well crafted transaction, bank financing may come
into play to complete the transaction three or four years into the payout.
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A Word of Caution |
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The details of how this transaction is structured are actually fairly
technical and will need to be managed carefully to make sure both parties
do not over-pay taxes. Over paying taxes on the sale of a business is easy
to do and happens every day. Your only assurance of getting this crucial
aspect right is to work with an experienced advisor.
In the end,
there really is a lot to this process. But, stepping back for a moment and
understanding what we are talking about here might help you appreciate the
hard work that lies ahead. We are talking about the biggest pay-day of
your life! If you are like most small business owners, 80% or more of your
personal wealth is stuck in your business. To truly succeed as a business
owner, you have to extricate this wealth before you die or become
disabled. Nothing secures your legacy or your financial security better
than a successful exit. So, if you can't find a suitable outsider, begin
grooming an insider today.
The key is understanding an exit plan
for what it truly is - a long-term methodical process, one that you cannot
navigate by yourself. An experienced team of professionals will be
invaluable to reaching your goals because with your team you can create a
plan that you will want to manage vigorously, year-to-year until the deal
is done.
Are you ready to get started? Here are a number of
questions you can begin to address with your team.
- How much time do you have and how well groomed is your potential
inside buyer?
- Are they motivated?
- Have you had any conversations with them already which may have set
expectations?
- What is the value of the business?
- What are your financial requirements in retirement?
- What are your financial desires/dreams?
- If the potential buyer is a child, does it make any sense to gift
some of your interest?
- Do you have a handle on your estate taxes and the impact on both
estate tax and income tax that the transfer will have on your situation?
Consider your options. If an outsider is something you are not
comfortable with or cannot find, look around, start asking questions,
gather a team and start planning. There just may be diamonds in the office
next door.
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Coming In The Next Issue |
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We thank Daniel A. Guglielmo for writing this month's newsletter. Dan
has been advising business owners for more than 20 years as a business and
tax attorney. He is the CEO and co-founder of TrustDesign, an integrated
team of tax, financial and legal planning professionals. Dan's passion is
helping business owners achieve a successful exit from their business -
one that leaves the business strong and secures the owner's financial
future.
Dan is also one of the founders of the Exit Planning
Exchange, a professional membership organization providing an
interdisciplinary process, education and networking opportunities
empowering advisors, consultants, educators, and researcher to help
prepare business owners to successfully exit from his or her business.
Don't miss the next issue of Exit for Success.
Out of the Box Thinking to Grow Your Business
Use
the link below to read previously published issues.
BizMACH is an association of highly skilled
consultants, evaluation experts and merger and acquisition specialists. We
take ordinary companies and create extraordinary value. Best of all, we
only work with lower mid-market companies.
Competitive advantage
is the key to revitalizing your company's growth and profitability. Call
us if you'd like a free consultation and to learn how BizMACH can
grow your company and increase its value.
When you work with BizMACH, you're using the
BEST®.
Business Evaluation and
Salability Tool
Tom Long
Solid Oak Consulting,
LLC
522 South Elmwood Ave
Oak Park, IL
60304
708-524-0886
telong@solidoakconsulting.com
Tom Long is an Associate Accredited by the
Institute for
Independent Business International
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