Does your business have a succession plan? It’s never too soon to start considering exit strategies, which usually come in three forms: sale to key management or employees, transfer to a younger generation of family members or sale to a third party. There is a lot to consider, from both a financial and non-financial perspective, when selecting the right ownership transfer method. For business owners seeking to maximize their proceeds, selling to an outside party is likely the best option. Here are a few reasons why:
- A buyer in the same or similar industry may be interested in the acquisition to eliminate a direct competitor, expand operational capacity, bring in new customer relationships, add new talent, reduce certain costs and result in additional economies of scale. These benefits also raise the purchase price, which could rule out internal buyers.
- Even if you hope to pass ownership on to family or key employees, it can still be beneficial to weigh difference between a strategic buyer and an internal one. A strategic buyer can still offer career opportunities to family members and key employees, without the financial stress of going into debt to acquire the company and the daily demands of business ownership.
- Private equity firms focused on your industry could also be a good fit. A private equity investment would enable you to offload a majority percentage of your ownership interest, provide funding to encourage growth, offer ongoing employment and still leave you with partial ownership interest that allows you to enjoy the benefits of the partnership. Download this e-book to learn more about private equity in the lower middle market.
Business attributes that appeal to strategic buyers
There are a number of factors that are important to strategic buyers, such as business model, industry, size, history of performance, service and product offerings, level of profitability, depth of management and annual revenues. To help improve the chances of a successful outcome, take some time to improve these areas and document progress. By planning for the sale early, you can demonstrate your improvements and accomplishments over the years. Here are some examples of interested strategic buyers and various goals and motivations:
- A company looking to enter a new geography, expand their customer base, acquire a trained workforce, add new product or service offerings and increase their operating capacity. In this scenario, the buyer would keep much of your cost structure, but get rid of executive and administrative costs.
- A company hoping to incorporate specific elements from your organization and get rid of many of your standalone costs, like personnel, administrative and occupancy. They may have capacity that acquiring your customer relationships will fill.
- A company in a related industry that wants to acquire your intellectual property, or consolidate the supply chain through a vertical integration. In theory, these types of acquisitions sound great but often end up being more challenging to complete.
Five questions to ask yourself before an outside sale
To help get an idea of how appealing your business is to an outsider buyer, ask yourself these five questions:
- Over the last five years, what is the overall financial performance trend? Are you hitting the expected benchmarks? Be sure you’re adjusting earnings to account for owner compensation and related party rents.
- Which product lines and service offerings have the highest gross margin? Knowing what parts of your business are responsible for higher margins allow you to build businesses development strategies that support goals and investments.
- Which professional relationships are most important? In the course of business, you’ll establish several relationships that are crucial to success (ideally, you won’t be overly depending on just one). However, if the acquiring organization knows this relationship would not be a risk to them, they may be willing to overlook it.
- How is your recruitment and retention? A business can’t succeed without a strong and knowledgeable workforce, which is why it’s such an attractive asset to buyers. Retaining talent, especially during the Great Resignation, will show potential buyers that your company is attractive to employees.
- Are you confident in your data? All of these questions need to be measured in some way. Be sure that you are regularly tracking your data and that it correctly portrays your business.
Don’t be afraid to seek assistance from an experienced professional, like the transaction advisors at RKL, who can offer you unbiased feedback on:
- Current preliminary value of your business
- Ways to improve the business’s financial performance before the sale
- Financial projections based on targeted strategic buyer
- Your personal financial situation and whether a sale will help you meet your goals
- Market research for timely industry valuation multiples and benchmark data
By starting the planning process early, understanding potential buyer motivations and gaining objective professional guidance, a strategic sale can be a viable succession option that financially benefits you and your family.
RKL’s business succession experts and transaction advisors can help your organization start the planning process now so you’re ready when the time for a sale arrives. Contact your RKL advisor or use the form below to contact us.