A business owner may have several options in transferring the business.  The tables below describe the different types of transactions to insiders as well as transactions involving third parties.

Inside TransactionsOutside Transactions
Intergenerational TransferSale to a Third Party
Management Buyout (MBO)Recapitalization (Recap)
Sale to Existing PartnersOrderly Liquidation
Sale to Employees (ESOP)

 
Intergenerational Transfer
The owner transfers the stock to direct heirs, usually children. 50% of business owners want to exercise this option – in reality, only about 30% actually do so.

PROS:CONS:
Business legacy preservationFamily dynamics
PlannedLack of funds/Illiquid buyers
Lower costLower sale price
More controlKey employee flight risk
Less disruptionTradition may outstrip good strategy
Higher buyer/seller motivationPath of least resistance – but not always a path to growth or success

 

Management Buyout (MBO)
The owner sells all or part of the business to the company’s management team. Management then uses the assets of the business to finance a significant portion of the purchase price.

PROS:CONS:
ContinuityDistraction
Highly motivated buyersThreat of flight (coercion of owner)
Preserves key human capitalIlliquid buyers / Heavy Seller Financing
PlannedLower price and unattractive deal terms
Can be combined with private equity for additional growth resourceManagers are not always good entrepreneurs

 

Sale to Partners

The success of this option may be closely linked to the existence and quality of a buy-sell agreement.  It is of course, not an option for single owner businesses.

PROS:CONS:
Less disruptiveDistraction
PlannedLower sale price
Well-informed buyersPotential discord
Controlled process, if buy/sell agreement in place and fundedCompetency gaps?
Buy/sell may restrict selling options
Lower transactions costsRealization of proceeds is often slower

 

Sale To Employees through an Employee Stock Ownership Plan (ESOP)

Generally suited for a gradual exit where the Company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees.

PROS:CONS:
Business stays in the “family”
Shares purchased with pre-tax dollars
May be more complicated and expensive than other options
Taxable gain on ESOP shares may be deferred
ESOP is an employee benefit
Requires securities registration exemption
Company compelled to buy-back shares from departing employees
Often causes employees to think more like ownersGenerally suited for a gradual exit

 

Sale to a Third Party
The Owner sells the business to a strategic buyer, financial buyer, or private equity group through a negotiated sale, controlled auction, or unsolicited offers.

PROS:CONS:
Higher price (highest of the options)Long process (9-12 months)
More cash up frontDistraction and loss of focus
Walk away fasterPrivacy concerns
Stability of deal termsEmotional for owner
Business refresh (growth, new energy)Post sale tie-downs
Cost-effectiveHighest cost option (highest benefit)
Breaks deadlock at management level with familyVery complex – approx. 1,000 professional hours Can be difficult to close

 

Recapitalization
Essentially this option brings in a lender or equity investor to act as a partner in the business. The Owner can sell a minority or majority position in the business although most times, the equity partner wants control of the business.

PROS:CONS:
Allows partial exitContinuing accountability to partners
Reduces owner risk – diversifies assetsLoss of control
Provides growth capitalCulture shift
Second bite at the appleSlow transaction
Works well with other exit optionsExpensive relative to benefit

 

Orderly Liquidation

The business is shut down through a simple, quick process. This makes sense if asset values exceed the ability of the business to produce income required to support an investment.

PROS:CONS:
Good option when asset value exceeds value of going concernUncertain proceeds – no guarantee No compensation for goodwill
Sum of the parts are greater than the whole
Efficient way to exit
Emotional
Stigma of “closing” the business.
May be less expensive than other exitsDamage to employees and jobs
May be higher tax (C-corporations)

 

VALUATIONS

Frequently, a business owner simply wants to know “what should my business sell for?”  A business owner could commission a formal business valuation.  However, a formal business valuation can be complicated and expensive.  What most business owners need is a Broker’s Opinion of Value (BOV).

A BOV is a broker’s opinion of what a business may sell for, based upon his/her personal analysis, industry expertise, knowledge of local markets and lending environment.

When NorthBridge prepares a BOV, we look at three distinct valuation methods: Market Approach, Income Approach and Asset Approach.  We then reconcile differences that might exist between the various methodologies and offer a specific value or a reasonable range of values.

Many businesses are transacted directly between buyers and sellers.  The parties are likely in the same industry and may have known one another for a long period of time.  Frequently, the parties have signed non disclosure agreements and exchanged information.  The same question can come from the buyer in terms of “what should I pay for this business?”  A Broker Opinion of Value can help provide a range of value enabling the buyer to confidently present a Letter of Intent, and move towards a successful acquisition.

NorthBridge can help either party move forward with reasonable comfort and confidence by preparing a Broker Opinion of Value for either the buyer or the seller.

 

NorthBridge Business Advisors

Execution with Integrity

Phone: 973-210-3040973-210-3040