There are several options for selling your business and those options fall into two general categories – sales to internal buyers and sales to external buyers There are a number of financial and non-financial implications that each of the various sales options offer. Let’s take a closer look at the pros and cons of selling your business internally.
Pros
One of the biggest advantages of selling to an insider is the buyer is identified at the outset. Having a buyer in place creates a huge advantage since the statistics for successful external sales are so dismal—approximately one in five businesses entering the marketplace actually sell. Some other positive attributes of internal sales are:
- The buyer understands the business.
- These types of sales can be structured to minimize taxes and fees.
- Business continuity is achieved.
- You can remain active with the business during or after the sale.
- It can serve as a reward for employees and management.
- It can provide a means of multi-generational wealth building.
- The exiting owner can maintain control during the transition period.
- It allows for the successor to be mentored by the owner during the transition.
Cons
One of the most common reasons that business owners do not consider selling internally to management or family is the lack of adequate financial resources available to the buyer, which might make it seem like an internal sale isn’t possible. Sometimes business owners have a need for immediate liquidity and an internal sale may not provide the needed cash. However, with creative solutions, proper planning, and adequate time, this is a challenge that we usually can overcome.
Some other possible negatives are:
- This type of business sale may require you to remain involved with the business.
- Your sale proceeds will likely be dependent on the future success of the business.
- The structure may require you to receive your proceeds over a period of time.
- Complex personal dynamics with multiple family members or employees can create challenges.
- The successor may require significant mentoring and or coaching.
- The transaction is normally funded through company profits or seller financing, which can inhibit the company’s growth potential.
In our book, Cashing Out of Your Business, we cover in greater detail the most common business exit options, in addition to their financial and non-financial implications. If you’re a business owner who is trying to decide on the best option for selling your business, you will need to understand the characteristics of each exit option and determine if it will help you achieve your goals. For example: you may want to sell your company to your son, but feel that you cannot afford to. You believe you need the immediate liquidity from your business to retire comfortably.
These types of dilemmas can be solved with adequate time and the proper comprehensive planning. In order to achieve your goals and not be faced with painful choices, commit the time to prepare your business ownership transition plan.
