A version of this article first appeared on EideBailly.com.
When planning for transition, one of the first questions you’ll need to ask is: Who is going to buy my business? Knowing the characteristics, motivations, and implications of each kind of business buyer can help you decide which to pursue.
Strategic Buyers
- Family Members: Family succession is one of the most traditional forms of business transition. Proper estate planning, valuation, and governance structures are necessary to mitigate familial conflicts and ensure the company’s continuity.
- Outside Party: This could include competitors, suppliers, other external businesses, or even customers. These buyers often have specific goals, like market expansion or diversification.
Opting for a strategic buyer offers several advantages. They often share existing business objectives, potentially leading to smoother transitions and higher purchase prices. Strategic buyers also typically buy 100% of the business and assume all responsibility. However, there are potential downsides, such as substantial changes to the company and complex due diligence.
Financial Buyers
- Employees: Employee Stock Ownership Plans (ESOPs) are an effective way to ensure continuity in the next phase of your business journey. With ESOPs, you can confidently leave a lasting legacy, optimize taxes, and maintain your company’s core operations. Employee ownership is also a powerful tool for attracting and retaining employees, providing long-term wealth-building opportunities, and cultivating a high-involvement work culture where employees act as stakeholders.
- Private Equity Groups: Private equity buyers aim for a high return on investment, typically through increasing operational efficiencies. They may bring new management into the company and reshape its strategy, focusing on long-term growth before an eventual exit.
- Venture Capital Firms: Venture capital firms inject capital with the expectation of substantial future returns. They usually seek managerial influence, often via board representation.
- Family Offices: Tailored to manage wealth for high-net-worth families, these entities often seek stable, long-term investments. Family offices control their wealth and are not required to work with other investors, allowing quicker decision-making and more flexibility concerning investment timelines.
Financial buyers have the potential to drive growth and expansion. However, they often maintain a hands-off approach to daily operations, which may not align with your long-term vision. Additionally, financial buyers may prioritize profitability and cost-cutting measures, potentially impacting the existing corporate culture.
Key Considerations When Selecting the Buyer for Your Business
You’ve worked hard to build your business, and you want to make sure the next owner will carry on the legacy you’ve achieved. When analyzing your exit options, ask yourself the following:
Does this buyer align with the company’s culture?
Ensuring a cultural fit between your business and the prospective buyer is essential. A mismatch can lead to turnover, reduced productivity, and a dilution of the brand you have worked hard to build.
Do we share the same goals for the business?
76% of owners who sold their business profoundly regretted the sale within the first year. To avoid seller’s remorse, ensure that your strategic objectives align with the buyer’s. Are you both looking for long-term growth or is the focus on quick profitability? A clear understanding of what each party aims to achieve will set the stage for a successful transition.
What will my involvement be after the sale?
Will you remain involved in the business in an advisory role, or do you plan to exit completely? This decision can affect the sale terms and your choice of buyer. Strategic buyers might want you to stay on during the transition, whereas financial buyers could prefer otherwise. Establish your desired level of involvement up front to identify the most suitable buyer.
How will my employees and customers react?
An ownership change can significantly impact your employees and your customers. A new owner could mean changes in benefits, work culture, or even layoffs. They may also bring a different approach to customer relationship management. Customers with solid relationships with the previous owner may need to adapt to new ways of working with the business.
Proactive Exit Planning Ensures a Successful Transition
When the time comes to sell, there are no guarantees that a potential buyer will share the same vision for your business as it stands today. Through strategic and thoughtful exit planning, you can safeguard your future and ensure a smooth and successful transition. Explore Eide Bailly’s comprehensive exit planning e-book for help preparing for and navigating this journey.