Profit & Loss - August 2009

Employees or an outside buyer

Selling a business to company partners

by Reed Radosevich

    If an owner’s children are uninterested in taking over ownership of the business, another consideration is transferring ownership to either a business partner or to an employee or group of employees.  Particularly if it is important that the business continue after the owner is gone, selling to an insider may provide a ready buyer who already understands the company and may be more committed to continuing the business than an outside buyer.

    If an owner holds an interest in a multi-owner company, the partners are likely to want to continue the business when they die or decide to retire.  Buy-sell agreements – an agreement between owners that establishes terms for the buying of each other’s share of the business in the event of death, disability or retirement – can simplify this process and ensure the funding is in place to make the transfer.   A buy-sell agreement offers the benefits of; providing a ready market, determining a set price and provides for continuity of the business.  Business owners typically fund a buy-sell agreement with life insurance. Alternatively, the surviving partner can buy the deceased partner’s share of the company on financed terms.

Selling shares through an Employee Stock Ownership Plan (ESOP)

    Sale of closely-held stock to an ESOP continues to be a popular exit strategy for many business owners, offering potential liquidity, flexibility and tax efficiency.  ESOP’s also provide much greater flexibility in terms than a sale to management or an outside buyer would provide.  With an ESOP, an owner can elect to sell the entire business at once, or structure the sale to take place over a number of years.  The sale can be structured as a cash or an installment sale and owners can also defer income tax on the sale through the use of specific tax rules.  Although the rules for establishing an ESOP are complex, the rewards can be great.

Selling your business to an outside buyer

    If the best option is to sell the business to an outside buyer, an owner will need to prepare the business for sale and find an interested buyer, both of which can take time.  While owners can choose to retain ownership of the business until their death, selling a business during the owner’s lifetime gives them more control over the process, and can help to make sure their family is taken care of.  Because family-owned businesses are not publicly traded, their exact value can be difficult to determine.

    Regardless of whether an owner chooses to sell the business during their lifetime or at death, there should be a formal appraisal in the planning process.  It is important to consult with a business broker or investment banker along with an attorney and accountant to ensure that there are plans well in advance to maximize the sales price of the business.  The deal team will be instrumental in finding potential buyers, performing legal and financial pre-sale due diligence and crafting purchase contracts.

Pursuing Private Equity

    The business may make for a good target for a private equity firm if it has solid earnings and growth prospects, a unique niche and a strong management team that will stay involved. A potential benefit of a sale to a private equity firm is that it may provide an opportunity for the owner to continue running the company even after selling ownership interest.  Typically, private equity firms request that management stay involved with the company for 3 to 5 years.  Since private equity firms often sell the companies they buy to larger firms in the future, there may be an opportunity to participate in the upside profits on a portion of the equity.  If an owner doesn’t feel comfortable taking direction from someone, selling to a private equity firm is not a good fit.

Planning to provide peace of mind

    A family business reflects family’s values, hard work and provides an owner and his/her family with income and security.  By taking the time now to prepare an exit strategy and a wealth transfer plan, an owner can protect his/her business and family, and give themselves peace of mind.  Owners should be sure to consult trusted advisors, including estate attorneys and accountants about all of the options available.

Reed Radosevich
Reed Radosevich is the Nevada President of Northern Trust