Many business owners will assume they will sell their businesses to a third party when they exit the company. Some owners even start their businesses intending to find a larger, more capital rich company to purchase the business and allow them to retire early. One of the real advantages of third-party sales is the potential to sell the business for cash. As with every exit path, however, it’s essential that you begin planning early if you are considering a third-party sale. There can be challenges involved with third-party sales, and owners who make plans improve their chances for a successful sale.
Here are four types of challenges that an owner may not foresee when he pursues the sale of his company to a third party:
Threats to Financial Security
There are pros and cons of third-party sales. While they often garner the highest sale price of any type of sale, they also, unlike with transfers to family members, require that the owner relinquish all control over his business to the outside party who is purchasing it. That means the buyer has to be capable of running it at a profit in order to pay the seller full price if he does not receive it in cash at closing. If the new owner can’t perform well enough to support the earn-out or pay off a promissory note, the seller will suffer financially. For any owner dependent on that money to fund the next stage of life, this would mean either returning to work or downsizing his lifestyle considerably.
The majority of would-be sellers have not planned out ahead what they will do after a sale, and even the ones who have made plans probably do not realize what leaving their companies really means in terms of day-to-day living or loss of power or self identity. Some of them will find they don’t like their new lives and with that comes seller’s remorse. It can be hard to predict whether sellers will experience seller’s remorse. They may be fully ready to turn the reins of the business over and yet not ready to fill the hours of suddenly empty days. It’s best to consider what the future will look like after a sale and making plans for how to live it in order to avoid the possibility of having seller’s remorse.
Again, once a seller has sold his company to a third party, it’s no longer his and he must relinquish control over it. Very few buyers come into their new companies and want to run them exactly as their predecessors did. Usually they will want to make changes to their acquisition post-closing. Those changes can be good or bad, small or radical. If a buyer wants to maintain some of that control either to protect his workers or his legacy, a sale to family members may be a more palatable option.
Taxes are complex. Some owners find that after a sale they owe a significant percentage of that price to the government in taxes. Obviously this is not ideal, especially for any buyer who intends to fund his retirement and has no other large source of income. This is why it’s essential to have a pre-sale analysis of the business and personal tax consequences of a sale. Otherwise sellers may get too far into the sale process before they realize they can’t afford to sell the business for the price they want.
All of the above are serious considerations for business owners to make if they decide to pursue a third-party sale. It’s always best to consider and plan well in advance when making a change this big and selling an asset this large. Erroneous assumptions can have negative effects for owners and their businesses. If you’d like to discuss the plausibility and challenges of a third-party sale for your business, contact us today. We will be glad to go over with you the steps of this complex process and create a plan for achieving your sale goals.