By: Amber Ferrie, Partner
No matter whether you’re just starting out, already getting going or ready to take the next strategic step, it’s important to think about your end game when it comes to your business.
If your end game is to sell, it’s crucial to consider your potential buyers and determine the best solution for you and your company as your business matures. In other words, it’s never too early to start thinking about who might want to buy once you’re ready to sell.
Think about it like the dating game. Let’s meet our potential dates … er, buyers:
For some owners, it’s appealing to sell directly to current employees. This is very attractive to owners who want to take care of their people, and there are various strategies to structure these types of transactions, such as an Employee Stock Ownership Plan. However, relatively few employee groups have the financial capacity to pay an owner what the business is worth.
The Outsider: Private Equity Group
Another reliable option is to sell to a private equity group (PEGs). PEGs are similar to the date who wants to flip a house. They invest in a home (company), make improvements and then, hopefully, sell for a gain. Each PEG is different and some groups like to have the owner involved in continuing to grow the business and business value. This gives both the PEG and the owner an upside in that the owner remains involved in the success of the business while the PEG is assured that they have maintained corporate knowledge and time to make the transition successful.
There are many great companies with success stories about long-term family ownership. However, family ownership can also see its fair share of problems when the company value declines due to the next generation not being able to run the business properly. A transition to family needs careful guidance, structure and often benefits from an unbiased third-party consultant.
One option to consider is a family office. A family office operates similarly to a private equity group, but is unique in the fact that it is established solely to manage a family’s wealth. As a result, family offices control their own wealth and are not required to work with other investors, which allows for quicker decision-making and more flexibility with respect to investment timelines. Furthermore, these organizations are less restricted in their selection criteria for investments.
So who would you choose? There are several options consider, each with their own set of pros and cons. However, even with all of these viable options, in the end the majority of sales are actually to an outside party. This could include competitors, or other potential buyers.
Regardless of who you choose, it’s important that you prepare for your date in advance, to ensure a smooth transition process. Here are a few simple steps to help you be date/transition ready:
- Get real. It’s important to get a realistic expectation of what your business is worth now and how to increase that value.
- Gain understanding. It’s helpful to truly understand what your transaction options are. You can do this by arranging to talk with a transaction advisor who can introduce you to PEGs, investment bankers and brokers.
- Be on the lookout. It’s never too early to start exit planning. You may face a challenging and highly competitive market when the time comes to sell your business. Even if a potential exit is years away, it’s important to focus now on key business issues, develop a planning process for the future exit and coordinate services with a wealth management team.
A version of this article originally appeared on BizWest.com.