Every company has its own unique circumstances and needs. As a business owner, you can choose from a number of different ways to transition out of your company in a sale or before retirement. When succession planning, you should consider your goals for both the company and your life after the transition, such as financial requirements and how much you want to remain involved in the business. Adequate succession planning ahead of time can also help to create significant value for your company.
A transition of a business can be internal or external. Under an internal transition, the company is usually passed on to the next generation of family or a management team member. In an external transition, a strategic or financial buyer purchases the company, either completely or partially. There is also the option of an employee stock ownership plan (ESOP), which falls somewhere in between an internal and external transition.
Full Business Transition
A complete transition occurs when 100% of company ownership is sold to an investor, such as a strategic buyer or private equity firm. Under a full sale, there is a complete change in ownership control, either as a stock deal or asset purchase. Complete transitions are most often asset purchases because it assuages certain liabilities from the buyer. The owner could be required to stay involved with the business through a transition period that can range from months to years, especially if they are a key part of management.
Business valuations in a full transition are based on competitive negotiations. In many sectors, a multiple of the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) and factors such as size, profitability, industry, customer base, and location. In a complete sale, the seller is often given the majority of transaction proceeds upfront, with the rest paid later through an earn-out or seller note.
Partial Business Transition
In a partial transition, most of the business is sold, and the owner remains involved to some degree. A key benefit of a partial sale is that it gives you capital to grow the company while the investor profits from this growth. It can also mitigate some of the financial and emotional stress of being a business owner.
One option for a partial transition is a majority sale of your company. In this situation, the buyer must acquire more than 50% of the business, and you remain involved. Under an asset purchase, you can roll proceeds over in a tax-efficient manner to hold this minority position. This can set you up for a second cash-out when the new majority owner sells.
Maybe you would prefer partial liquidity so that you do not give up majority control for now, with a plan to exit completely in several years. In this case, you can find a minority recap partner who acquires less than 50% of a company, which lets you lower your risk in the business. Investors will usually buy 20-40% of the business for a preferred equity position. As the owner, if you are involved in management, you can continue this role, but the investor can choose to augment the management team.
As previously mentioned, you also have the option of an ESOP sale. This allows you to sell all or part of your shares to your employees. This method can offer you tax advantages and create a way for employees to stay invested in the future of the company with no upfront cost to the employees. An ESOP relies on tax-advantaged seller financing and bank loans to facilitate the transaction. You, as the seller, will only receive up to half of the transaction proceeds in cash and the rest over a period of years. The business valuation in this scenario is rather conservative and based on factors determined by you and the ESOP trustee, and will include discounts to fair market value for the stock. An ESOP transaction can be a good option for owners who are seeking tax advantages, continuity in operations, and distributed execution of a business service.
Internal succession by a family member or close management partner is another path for transitioning your business. This allows it to become a generational business or remain one. Under this type of transition, you will need to properly plan for the transition of key relationships with customers and suppliers, professional education and development, and careful estate planning.
Which Is Right for You?
Any company transition can come with its share of pros and cons, depending on your goals. If you find the right deal team equipped to help you find the right buyer, you can arrive at a strategic partnership that can serve as a huge benefit to your business and get you the payday you deserve. At the same time, if your deal is not structured properly, you can end up losing control of your business’s future or in some other type of situation that you regret. This is why partnering with an experienced M&A deal team is crucial to helping you achieve your goals on your terms and avoid making common mistakes.
Reach out to our experts at Benchmark International to gain a clearer understanding of how to fulfill your ambitions, whether it’s through a partial sale, a strategic partnership, or a complete exit.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $7B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.