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Succession Planning for Privately Held Companies

September 13, 2016

For a business owner, their company is their life’s work. They’ve spent years becoming an expert in their industry and strategizing for success. At some point, all owners find themselves in unfamiliar territory: designing a succession plan that will achieve their objectives. Whether the goal is generating liquidity to fund the next business venture or simply retiring, planning for succession can be one of the most challenging strategic decisions during a business owner’s career.

Perceptive business owners know that deciphering the market takes time and analysis; the market for a business sale is no different. So, how does one begin the succession planning process? The initial steps involve gaining an understanding of the spectrum of available buyers, current market activity, and how the business would be valued in light of the company’s performance – and especially the company’s future opportunity. This article discusses the broad universe of buyers. Generally speaking, most business owners will find the following parties as potential acquirers in their respective markets: a strategic buyer, private equity group, management buyout, or employee buyout.

Strategic Buyers

What is a strategic buyer? Simply put, this buyer may be a competitor in the same industry or operate in a related field. Strategic buyers are usually looking to acquire a ready-made business to increase market share, revenues, and service offerings while expanding their current brand. They’re typically able to pay more for the acquisition, but that often comes with the price tag of expectations that may conflict with those of the current owner(s).

Financial Buyers

Private investors account for another type of buyer, frequently categorized as financial buyers, most often in the form of a private equity group or investment firm. These buyers look to invest in a company and hone in on rapid growth opportunities for the purpose of selling, often within a specified time period ranging from three to seven years. In many instances, private equity groups may keep the existing management team in place while bringing industry experience and resources to the table; though these buyers don’t usually pay as much as a strategic buyer.

Management Buyouts

In a management buyout, the owner sells the company to the current executives. This transaction maintains stability for the current employees and ensures a high level of confidentiality around the business. On the flip side, the management team lacks access to a pool of available capital to fund the sale from the current owner(s), and would likely need to secure outside financing to complete the transaction. In the same vane, management teams probably won’t have the excess capital to invest in strategic growth objectives for the company. Current owners will often help finance a management buyout, which is referred to as seller financing. This may appeal to owners possessing the utmost confidence in their management team, but it wouldn’t offer any significant liquidity right away.

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 significant analysis, selling a business to an ESOP can offer an incredibly impactful exit option for owner’s looking to maximize cash at closing while maintaining stability for their employees and preserving their legacy.

Take the First Step

“Start the process with a preliminary question: what are the owner(s) most critical objectives?”

While there may be different roads a business owner can take when stepping away from the company, beginning a succession planning process with clearly defined objectives will paint a clearer picture of the most appropriate buyers. Start the process with a preliminary question: what are the owner(s) most critical objectives? Maximizing cash at closing? Preserving the business’ legacy? Keeping the business in the family? Contributing to the economic health of the company’s community? In order to successfully address their objectives, owners should enlist the support of their current advisors in addition to hiring experienced outside advisors who will guide them to completing the right transaction.

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