As a business owner, your company has been your life’s work, and you’ve likely spent years investing immeasurable resources into that company, strategizing for success.  At some point, however, owners invariably find themselves in a situation where they need to begin thinking about a succession plan that will help them achieve their future objectives, whether that’s generating liquidity to fund the next business venture or simply retiring. Regardless of objectives, succession planning can be one of the most arduous decisions in a business owner’s life. 

So how do you begin the succession planning process? One of the first steps is gaining a deeper understanding of the company sale process and specifically the different types of buyers that might be involved when selling your company.  Becoming familiar with the characteristics, objectives, and processes of each type of buyer, will help align your vision for the future of the company with that of the buyer. 

The following are the typical potential buyer types for your business: strategic buyers, financial buyers, and employee buyers (through an employee stock ownership plan, or “ESOP”). 

Strategic Buyers 

A strategic buyer may be a competitor in the same industry or a company that operates in an adjacent or related field. They generally look to acquire an established business to increase market share, diversify their product or service offering, or expand into a new geography. They’re typically able to pay a “premium” for the acquired company due to perceived synergistic value, but that often comes with expectations that may conflict with those of the current owner(s). Below are some key benefits and considerations of selling to a strategic buyer. 

Primary Benefit: 

  • Highest value consideration.  A sale to a strategic buyer will likely generate incremental value to the current owner compared to a sale to a financial buyer or ESOP given the synergies that may be recognized through the purchase 

Considerations: 

  • Loss of strategic and operational control after the transaction is complete 
  • Future of existing management and employees unknown due to possible redundancies with acquiring buyer 
  • Intellectual property and best practices shared with competitor(s) 
  • Longer execution time to complete the transaction (six to nine months) 

Financial Buyers 

Financial buyers, which include private equity groups and other variously purposed investment firms, comprise the second primary classification of buyer.  Financial buyers seek to acquire or make investments in companies principally to generate an economic return on the investment by driving growth and operational efficiency.  They are in essence professional “buyers” who typically have deep experience within the industries in which they focus.  Their objective is to buy and hold a company for typically a three- to seven-year period, followed by their own exit, often also a company sale.  In most instances, financial buyers will keep the existing company practices and management team in place, while leveraging their own industry experience, resources, and personnel.  Below are some key benefits and considerations of selling to a financial buyer. 

Benefits: 

  • Well capitalized partner 
  • More predictable future for existing management and employees  
  • Opportunity for reinvestment or “rollover” into the acquiring entity, allowing participation in future growth 

Considerations: 

  • May receive lower purchase price versus selling to a strategic buyer
  • Potential disruption and turnover risk to existing employees 
  • Longer execution time to complete the transaction (six to nine months) 

Employee Buyouts 

An employee buyout, often in the form of selling the business to an Employee Stock Ownership Plan (ESOP), is a unique exit strategy.  At its core, an ESOP is a qualified retirement plan that offers business owners an exit path while also creating wealth for the company’s employees. Although the transaction requires careful planning and analysis, selling a company to an ESOP can offer an incredibly impactful exit option for owners looking to maximize cash at closing while maintaining stability for their employees and preserving the owner’s legacy.  Below are some key benefits and considerations of selling to an ESOP. 

Benefits: 

  • More control over your legacy. The business name and employees remain fully intact  
  • Attract and retain employees, while boosting employee morale  
  • No disruption to the business, which can occur in a third-party sale  
  • ESOP-owned companies are eligible for tax advantages, which among other things, make the repayment of debt associated with the transaction much easier  
  • Potential capital gains tax deferral for the seller through a “1042 rollover” 
  • The transaction can be structured in phases, so the owner does not have to sell the entire business all at once 
  • Shorter execution time to complete the transaction (four to six months) 

Considerations: 

  • May receive lower purchase price versus selling to a strategic buyer (but still at fair market value) 
  • Potential for lower cash at close depending on how the transaction is financed

Clearly, selling your company is an incredibly momentous and nuanced process with ramifications that extend far beyond your own wealth and estate planning.  If you are contemplating a sale, be sure you know all the options available to you so you can make the most informed (and rewarding) decision possible.  

If you are interested in learning more about your potential sale options, click here to request a complimentary sale feasibility analysis for your business.