Considerations for an Insider Sale
Here are a few stats you should know before you sell your
- At any given time, 20% of all businesses in the country are for sale, but only one in four will actually sell.
- The larger the business, the better its odds of selling. Among businesses with revenues of $10 million a year, one in three will sell. For businesses with revenues above $10 million, the odds improve to one in two.
Apparently, just as we’ve always suspected, size matters!
What happens to those businesses that don’t sell?
A large percentage are just shut down and liquidated. Many businesses, however, transfer through insider sales; that is, they are sold to family members, key employees or co-owners.
That’s good, right?? The real answer is: “It’s complicated!”
Generally, most insiders – family, employees, co-owners – don’t have the money or the borrowing power to pay you cash in full at closing.
Probabilities are very high that you will end up financing at least part of the transaction. This means you may have to wait years to receive all your money and you’ll be carrying risk all that time: risk of default, risk of business failure, and risk of market collapse.
The structures of the deals that govern these ownership transfers are as numerous as the kernels in a large tub of popcorn at the movies.
There are, however, several considerations that will improve the chances for an insider sale to be successful.
First, make sure that the person(s) to whom you sell your business is capable and dedicated.
This person holds the key to the success of this sale! Many owners, after finally accepting that an outright, third-party sale is not an option, are frustrated and anxious to find someone (anyone!) who can provide them with a way out. They are ready to move on to their “Life Beyond Business.”™ The vetting of viable candidates to lead the company into the future is often fraught with emotional considerations like whether son, Joe Jr., is ready and able to take over, or whether that long-ago promise to sell to a trusted, long-time employee is realistic.
Failure to objectively evaluate the candidates can be a recipe for disaster, especially if your future financial security is dependent upon realizing value from your company.
Second, the continued success of the business after you leave is essential if you hope to collect all the money owed you from the sale.
This means you need to prepare for your departure from the business well in advance by building a competent, incentivized management team and developing productive systems and procedures. A further goal is to position the company with as little debt as possible. Since you are financing the sale, you want to make sure of the business’ continued success.
Finally, any deal must be structured with a clear understanding of the tax implications for both the seller and buyer.
The buyer will be completing the buyout over time using the future cash flow of the business. Without proper tax planning, the effective tax rate on that cash flow could be in excess of 50 %, meaning that it could take years longer to complete the buyout. This simply may not be feasible for either party and could jeopardize a sale.
This is your retirement, your chance to pursue your “Life Beyond Business.”™
But visualize this…
You’re lying on a beach in Aruba, enjoying your favorite beverage, when you receive the following message, “Company’s major vendor won’t ship materials…can’t make payroll…not going to be able to catch up on delinquent buyout payments after all… business in crisis…need you to come back!”