Part 1: Transitions, transactions and trust in business

We are considering an important hypothetical scenario. Two partners set out to sell their company. Most of their net worth is invested in their business and one of them happens to have a health issue – so they want to diversify their wealth holdings. After taking their business to market and receiving an excess of six offers, they ultimately select the offer that allows them to take some money off the table based on a high valuation. However the terms and conditions of the deal are such that the cost of capital is higher than they could have attained from a traditional lender. Instead of selling 100% of the company to the highest bidder, they end up selling a minority position with fewer oversight obligations.

Why does this matter?

There are many ways to take your money off the table when selling a business. The concept of “taking money off the table” in this case, is in reference to entrepreneurs who have built a business, but their net worth is tied up in the company – it’s not cash and therefore is not readily available, like a public stock, which you can sell in the market. The sources available to them to access capital range from banks, to private equity and everything in between.

In this series, we will explain that not all deals are made equal, how to assess offers, important questions to ask during the sales process and how to best access capital.

There are deals that make sense and deals that don’t make sense.

As an advisor, I try to understand what is driving clients to make the decision to buy or sell a business(es). More importantly, I utilize relevant data and research, in combination with what the heart, head and gut desire, to determine the correct path forward. When these factors aren’t in alignment, a deal should not take place.

Let’s discuss this in more detail.

Say you are a business owner, and your business is for sale because a family member (who is also an owner in the business), has developed a heart issue. This health scare emerged a few months back, but now the two siblings are actively thinking about their succession plan and taking some money off the table. Just in case something happens.

So all their eggs aren’t in one basket.

This is a good idea; diversification is smart…is what some might say.

Some start-ups get investment – a lot of it. Others use sweat equity. In this family business, the partners began by investing around $1,000 each, then grew the business into a multi-million dollar operation. Returns, in this example over a 20-year period were more than 55%. North of private equity returns. This doesn’t always happen of course – there are lots of businesses that fail. But this post is addressing those who’ve managed to build successful companies.

The issue for these successful businesses is often most of the partners’ personal net worth is housed in the business. This is the case for the two hypothetical partners we’ve been discussing.

Here’s more background on their case: their business earns nine figures in revenue annually and eight figures in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). They’ve done so for more than five years straight.

Note: in relation to the economic impact of COVID-19, they wouldn’t be classified as an essential service and the sectors they service, as a professional services organization with over 250 personnel, wouldn’t be classified as an essential service either.

Should they sell?
Who should they sell to?
When should they sell?

It was decided that since they want to sell up to 100% of the company, the best target buyers would be either private equity groups or operating companies (worldwide) who are already in the sector.

Stay tuned for Part 2 of this series.

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