Reasons For Selling A Business


A business sale is not a “one size fits” all situation. The details that apply in a specific situation will not all be the same. Before proceeding further, it’s important to step back a bit and look at the big picture for business sales in a variety of circumstances. Not all business sales are for the same reasons, and the circumstances of the sale can have a big impact on how a sale should proceed.

What KIND of Buyer is it?

Before considering the various sale situations, it helps to consider the KIND of buyer. In almost all cases the buyer will be either another company or an individual.

If the buyer is another company then it is likely the buyer will be able to run the business successfully. The buyer’s ability to pay may be fairly secure. Training the buyer may not be critical, but assistance with customer retention after the sale may be critical. The buyer may be more sophisticated, or at least have more sophisticated advisors. Consideration for the sale may include some form of performance based incentives (i.e., an “earn-out”).

If the buyer is an individual, training the buyer may be even more important than assisting with customer retention. Since the buyer’s ability to run the business successfully may not be as certain as it would be if the buyer were another company with a proven track record, the cash and/or collateral the buyer brings to the table may be a major factor in the sale.

The Most Common Sales Situations

These are the most common sales situations. Whether you are a buyer or a seller, one of these situations most likely fits you. Additional details applicable to each are covered later in subsequent articles.

Very Small Business – This is the most common business sale situation

  • Sometimes referred to as “Mom & Pops”, “Main Street Businesses”, etc.
  • Most of these businesses do not actually sell.
  • This is usually a sale to an outside individual (an “External Sale”).
  • Sometimes (although rarely) the sale will be to an insider (an “Internal Sale”).
  • It is rare to have an employee with both the interest and the ability.
  • The person needed can sometimes be recruited.
  • Can often be creatively structured as a win/win, even if the buyer has little money.

Somewhat Larger Small Business – External Sale

  • More likely to sell than a Mom & Pop, but many never do.
  • Internal Sale
  • Easier to structure than for a Mom & Pop, but still difficult to find the right successor.
  • Family Sale
  • The IRS has insanely complex rules designed to make sure they get all the tax revenue they think they are entitled to. Which is A LOT.
  • Will most likely need an appraisal to support the price.

Divorce

  • Often VERY contentious, with expensive appraisal and attorney fees, and the eventual price and terms set by a judge.
  • Can sometimes be greatly simplified with advance legal planning (such as Shareholders Agreements).

Partner Buyout

  • Can also be contentious.
  • Can sometimes be greatly simplified with advance legal planning (such as Shareholders Agreements).

Sale for Health Reasons

  • If the seller is in ill health but not clearly dying
  • Time is not as critical as for a dead or dying seller.
  • Potential buyers may try to take advantage of the situation.
  • The seller’s help with the post-sale transition may be affected.
  • If the seller is still alive but clearly dying
  • A sale planned to occur upon death can sometimes be arranged.
  • This has the potential to save a LOT of tax.

Seller (business owners) has passed away

  • The company may be in turmoil.
  • Can be VERY difficult to find a buyer.
  • Tax issues can be VERY complex.

Financially Distressed Sale

  • If the business is in trouble, the buyer will need to see a way to fix the problem, or a sale will not happen.
  • Often involves simply liquidating the assets and walking away.
  • May be forced by the company’s lenders.

Sale to a Large Buyer

  • Likely to be fairly sophisticated buyers.
  • Likely to include an “earn-out” as part of the “price”.
  • Publicly traded buyers
  • May involve tax-advantaged strategies involving the buyer’s stock.
  • Large, closely held buyers
  • May be easier to attract than a publicly held buyer.

Start-ups

  • Often done with personal funds.
  • If funding is from family and friends, then their ownership must be decided.
  • If Venture Capital is involved, then complexity goes way up.
  • Usually only available if the upside potential is very high.
  • Initial Public Offerings (“IPO’s”)
  • Basically, this is selling part of the company to the public in the form of company stock.
  • Often involves venture capital at an earlier stage.
  • VERY complex.

Employee Stock Option Plan (ESOP)

  • Very complex and expensive.
  • Can have significant tax advantages.
  • Might have motivational effect on employees.
  • Not as popular as initially expected when these were created.

Very Small Businesses

These businesses are sometimes referred to as “Mom & Pops”, “Main Street Businesses”, etc. Although each company is small with only a few employees, they represent a huge part of the goods and services available in our economy, and are the embodiment of the American Dream for many people.

Attempted sale of these businesses is the most common business sale situation. Unfortunately, most of the time they never actually sell. Some estimates are that only one in seven of these businesses will actually sell once they are listed for sale. Many more simply shut down once the owner decides to move on to something else.

Unrealistic expectations on the part of the seller, particularly the value of the company, are one of the reasons blocking sale of many of these companies.

The value of these companies is NOT the value of the company to the seller, which may be quite high. Instead, the maximum value is limited by the cost a potential buyer would incur to start a similar business instead. That means the value may be determined by the value of the equipment, plus something extra for the “running start” available to the buyer from buying the existing business instead of starting a similar operation from scratch.

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