Volume 7 • Issue 5 • May 2017
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month’s issue will be a discussion of step four of the exit planning process – selling your company to a third-party. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
This newsletter is the fifth in a continuing series of newsletters discussing the seven step exit and succession planning process used by Hallock & Hallock. In this month’s issue, we will take a closer look at step four – selling your company to a third-party. In step one, we determined what your goals and objectives are; in step two, we addressed valuing the business; in step three, we determined how to build and preserve the business value. With steps four and five, we are assessing the potential buyers of your business. Step four is only necessary if you think you may want to sell your business to a third-party. A third-party is someone other than an employee or family member. If you are certain that the transfer will occur to an insider, we would skip step four and move directly to step five – transferring ownership to an insider.
While selling to a third-party eliminates some of the difficulties that come with insider transfers, these transactions have their own level of complication. Sales price can be influenced by the ebbs and flows of the market. A sale can take much longer to complete than anticipated, and many businesses that are listed for sale do not sell. The best way to ensure success is to get organized; to plan well in advance of putting the company on the market. So what are some of the advantages and disadvantages of selling to a third-party?
- You get cashed out. Insider transactions often involve seller financing, which means you are still at risk. Getting as much cash upfront as possible minimizes your risk.
- Treating all children equally is easier as you are now dividing money without the worry of who is going to run the business or whether they can succeed.
- You will likely be unable to protect the personality and culture of your business.
- You will be unable to maintain the legacy of keeping the family business in the family.
- You may not be able to get out of it what you would like.
Is Your Company a Candidate for a Third-Party Sale?
In determining whether or not your company is a candidate for sale to a third-party, you should understand what buyers consider important:
- An appealing market sector or market position;
- A strong historic and forecasted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization);
- Strong fundamentals, such as customer base, accounting practices and business processes; and
- A unique competitive advantage.
If your business does not meet the buyer’s standards in these areas, you may have more difficulty selling and/or may be required to finance all or part of the sale. This puts you in a much greater position of risk and may make an insider transition more appealing.
What Should You Do Now?
If you are interested in selling to a third-party, here are a few things you can do now to prepare:
- Assess where the business is today in terms of value, desirability, and competitive advantage.
- Conduct your own pre-sale due diligence. This allows you to find your own skeletons and address them before a potential buyer does.
- Develop and lock-up management talent through stay bonus agreements and other incentive plans.
Whether it is a sale to a third-party or an insider transition, a qualified exit planning advisor can help you and your team put the pieces in place for you to find success. If you would like to exit your business in the next five to ten years start planning now.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.