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Selling a Business - Selling to a third party buyer
By Admin | October 19, 2007
One challenge that ALL business owners will face sooner or later is choosing the best way 
for them to exit their business.
Most business owners will choose to sell their business… but even this isn’t as straight forward as it seems.
As a business owner you need to decide how you will sell your business.
Will you:
- Transfer the ownership to your children?
- Sell to a third party?
- Sell to your employees?
Truly there is no right answer as to what is the best overall way to sell your business is. As we always say, your exit strategy will really depend on your goals.
In this article I’ll go over selling your business to a third party buyer… and the advantages and disadvantages of this option.
To put this in perspective, about 20% of businesses are for sale to a third party… but as you know… selling a business is not an easy task. So, only about a quarter of these businesses actually sell.
If your business is bringing in over $11 million a year, your odds of selling your business actually increase by 100%. If you fall into this category… congratulations! If not, selling to a third party may be a bit more of a challenge that you need to be ready for.
So, what are some advantages of selling your business to a third party buyer?
- You usually get cashed out at closing. Enabling you to reduce risk and reach your financial objectives much sooner. The larger your business is the more likely you will be cashed out at closing. Many mom and pop businesses that sell to a third party often cannot find a buyer who will cash them out at close… but the cashout is always a possibility with a third party buyer.
- Have more opportunity to receive more than the estimated value because of a hot market. Of course, if you are intent on selling to family or employees… your market is captive and you do not want to look like you are gouging them. However, when it is a third party buyer, you should be out to get as much as possible… and often can get more simply because of increased buyer competition.
- Passing the wealth from the sale on to your children can be easier (from an emotional standpoint) when selling to a third party. When you transfer ownership to your children… often times sellers feel the burden of deciding which children will run the separate parts of the business.
Just like with any exit strategy, selling to a third party buyer does have its disadvantages. Often times the disadvantages are not cause for worry for many sellers… but other sellers do have a difficult time with the following disadvantages.
What are the Disadvantages of selling to a third party buyer?
- Usually you don’t know the buyer from Adam… so if you choose to carry any portion of the purchase price in the form of a note or royalties… you are placing yourself at a risk of default. Try to get as much upfront as possible. The last thing you as a seller want to be burdened with after getting out of your business is having to take it back from a buyer who has run your business into the ground.
- Change in the business culture. Buyers usually don’t come into a company and leave everything exactly the same. They will likely want to inject some of their own personality and practices into the company. While this is excellent if the change is for the better… many buyers come in and just crush the morale of the employees with big changes in the company. If the company culture and personality is very important to you, consider selling to somone on the inside.
To sum it up, whether you choose to sell your business to your employees, family, or a third party buyer… you will have to navigate the pros and cons of each strategy.
As a seller, you should begin thinking about how you want to exit your business as soon as possible. The more time you have to plan… the better off your transfer will be. So, if you’re within 5 years of your target selling date… you should begin to seriously think about who you want to sell the business to… someone on the inside or a third party buyer.
As always, feel free to shoot any questions our way or post them here in the comments section.
Cheers!
Topics: Exit Planning, Exit Strategies, Planning Your Exit, Selling a Business |