8 Ways to Sell Your Business

March 13, 2013

I often have found small business owners unaware of the myriad ways to sell all or a part of their business. In advising business owners, it is important to explore these options in order to create the best opportunities. Here are eight structures for sellers to consider when contemplating a sale of their business. There are more, but these are the most common ways for lower middle market companies to “exit”.
1. Sell to Strategic Buyer
Strategic buyers are companies already in your industry. The goals of a strategic buyer in acquiring your company can vary. For example, a strategic buyer may be able to institute cost cutting measures and consolidation to achieve greater EBITDA. A strategic buyer may be looking to expand geographically, add a product line, eliminate a competitor, add talent or “roll up” its industry. A strategic buyer usually, but always, pays the highest price, but most likely will restructure your company.
2. Sell to a Financial Buyer
Financial buyers can be individual investors or a firm with experience and capital, like a private equity firm, looking to buy a company, grow it and sell at a substantial profit. Financial buyers look for opportunities to acquire companies in which they can generate a substantial IRR before selling, usually in the 5-7 year timeframe. Here, typically debt is used in the financing of the deal and, often in smaller deals, the buyer is expected to take back a note to support the deal and assist in the financing.
3. Management Buyout (MBO)
An MBO is where a current manager (or a group of managers) of a business raise capital and arrange debt to acquire all or part of your company. Challenges include the ability of the group to raise the equity level required by the banks and the right mix of managers to acquire the firm.
4. Sell A Product Line or Division
This method and structure is often overlooked by business owners. Rather than sell your entire business, it may make sense to “peel off” a product line or division and sell it first. Owners may contemplate this approach when market conditions do not support a favorable sale of their entire business but growth capital is needed and debt is not available.
5. Recapitalization
In a “recap”, the company raises money (via debt or equity) and buys back shares from the owners of those shares. This method can be used to buy off a disgruntled (or troublesome) shareholder. Of course, the ability to use debt to effectuate a recap depends on strong EBITDA and the company’s ability to borrow additional funds from lending institutions.
6. License With An Option
Entering into license agreements with larger companies often can be a fruitful way to generate growth and an ultimate exit. This is a hybrid approach consisting of providing a larger company with (1) a license of your technology and (2) an option to purchase your company down the road. This approach is gaining in popularity, especially in the life sciences sector given the large risks associated with drug development and the like.
7. Private Placement of Equity for Family Owned Businesses
There are investment firms in the US which specialize in buying significant stakes in successful private or family owned firms. These firms link IRR to the achievement of financial goals and work in concert with you to grow the company with an eye toward selling the business within 3-7 years.
8. Initial Public Offering or Self-Registration
There are a few alternatives available in the public markets for middle-market firms to go public, including self-registration, reverse merger and, occasionally, initial public offerings. The benefit of these structures is increased liquidity for the remaining shares and cash for the shares sold. Business owners are wise to evaluate these alternatives carefully, making sure the future performance and growth of the company is projected to be strong and that the market can support the stock.

John Hallal is a Adjunct Lecturer at Babson Business School where he teaches Mergers & Acquisitions for Entrepreneurs, a business attorney and advisor to lower middle market business owners. http://www.accelerationlaw.com

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