There is a reason it’s called exit planning -- the steps involved in determining how to ultimately leave the company you’ve built require careful thought, deliberate consideration, and plenty of time.
There are many directions you can take in the sale of a company, and considering who you’ll eventually find at the other side of the negotiation table is one of the most important things to understand as you get started down the path to an exit.
There are six common buyers you will likely encounter as you market a business for sale. As each have differing priorities and represent unique outcomes for the business, educating yourself on each buyer type is one of the first steps in beginning to plan the sale of your company.
1. Strategic buyers
One of the most likely buyers of a company is another company. The businesses that pursue growth through acquisition are often referred to as “strategic buyers.” This name is bestowed because the companies look for acquisition targets that are aligned with their core strategy, rather than other characteristics of a company, such as financial metrics.
One advantage of selling to a strategic buyer is that your business might command a higher sale price. Strategics will often pay a premium for the synergies that make your business a natural fit alongside their own.
Typically, however, the higher acquisition price can come at a cost. Synergies often accompany redundancies between the two companies that may be eliminated during the merger or acquisition. By selling to a strategic, you risk the jobs of employees in departments that overlap from company to company (such as accounting, human resources and marketing). In addition, the brand and identity you’ve worked to build for your business may be absorbed by that of a competitor.
As a result, selling to a corporation is ideal for business owners looking for a lucrative exit, where the future direction of the company and its employees is not the primary concern.
2. Private equity
Private equity firms are investment vehicles for institutional investors or high net-worth individuals. Limited partners (“LPs”) invest their money into funds that general partners (“GPs”) of the PE firm use to buy companies, typically within a specific industry. PE executives seek to maximize the growth of the portfolio companies over five to seven years before selling them and earning a return for themselves and their investors.
PE executives bring the financial resources and the corporate acumen to take your operations to the next level, and in many cases they will retain company owners and operators for on-the-ground expertise, making them a great option if you’d prefer to retain a piece of your equity stake. Selling to a PE firm is a great way to help your business realize its full potential.
Given the nature of their funds, however, private equity firms are usually looking to maximize the profitability of your business in the short term. This overarching thesis will inform a lot of the decisions they make for your business.
3. Family office
Family offices resemble private equity firms in some respects, but they differ in important ways. Rather than acting as investment vehicles for groups of high net-worth individuals and institutional investors, family offices invest the money of a single wealthy family, typically with a focus on the industry that netted that family its fortune. Family offices’ primary objective is ensuring that familial wealth spans multiple generations.
As a result, as compared to private equity firms, family offices tend to hold more conservative portfolios, invest on longer time horizons and take far less active roles in their portfolio companies.
However, family offices are scarce and difficult to reach. Since they invest with only cash (and not debt), the sale prices they offer are usually lower than their PE or strategic counterparts. Family offices are ideal for the business owner looking for industry guidance and/or direction.
4. Holding company
Holding companies (also known as shell companies) exist primarily for the sole purpose of owning other companies. Typically they do not sell any products or services of their own. Instead, they generate revenue from the dividends and earnings of the stock they own in other businesses. The most famous example is Warren Buffett’s Berkshire Hathaway.
Holding companies often seek a controlling stake in the companies under their umbrellas, which means that while selling part or all of your business to a holding company can be a relatively simple way to cash in equity. However, the additional support brings more cooks into the kitchen. Instead of running the business solo, you have to confer with new members of the board.
Keep in mind also that, while holding companies owned by others might make good buyers, there can be tax benefits in certain instances to forming your own holding company as part of your sale process.
5. Search fund
If the idea of managing a sale primarily through an individual is appealing, then exploring search funds can be a great option. Search funds consist typically of an individual, backed by a team of investors, looking to buy a business and take over the operations.
Often, that individual is a recent MBA graduate who aspires to operate a business. His or her team of investors is willing to buy the company for the individual to operate, confident that he or she will generate a return.
While this scenario involves a “green” buyer and any associated risks, it can nevertheless be a great way to ensure the long-term vitality of your business by infusing the C-suite with youth and energy. If you’d like to see your business continue on without you and you are willing to bet on ambition, then selling to a search fund is a great option.
6. Your employees
Selling to new parties -- such as the above options -- can welcome some measure of change on the direction and/or operations of your business once ownership is transferred. If you’re looking for an exit opportunity that allows your company to maintain its current course in your absence, look no further than your employees.
An employee-stock ownership plan (ESOP) will gradually transfer the company’s equity into retirement packages for your employees, while a leveraged ESOP provides the employees with debt to buy the owner out of a portion, if not all, of his or her equity up front. ESOPs provide employees with valuable measures of input and control, but they also add administrative hurdles that can slow future development.