External vs. Internal Business Sales

As a business owner, receiving an offer for a big payout from a potential buyer is exciting. However, you need to consider more than the money. You have worked hard to build your business and you likely want to make sure that it continues even after you have achieved your financial goals. The transaction will have a future impact on your employees, customers, the reputation of the business, and potentially your family and legacy.

When looking for a qualified buyer, the first thing to determine is whether you will you a) sell your business internally to management, co-owners, or family members, or b) sell it externally to a third party.

At the outset, most owners believe they’ll sell their businesses to a third party. However, this is not necessarily the best option and can be much harder to achieve.

This decision needs to be made before you start looking for and qualifying potential buyers.

Start Early

Putting together a business transition plan early on can help provide you with more options and the flexibility to transition out of your business on your own terms and in your own time. Outline your non-financial goals, determine how much money you need to net to fund your retirement, and figure out what level of involvement you want to have going forward. The qualities you will want to look for in a buyer will vary depending on which type of transfer you undertake.

Qualities to Consider in an Internal Buyer

The most common internal sale options are management or leveraged buy-outs, Employee Stock Ownership Plans (ESOPs), and stock redemption plans. All of these generally involve seller financing or a buy-out over a period of time, which is funded by the continued profitability of the business. Therefore, it is crucial for the transitioning owner to give careful consideration to the choice of successor.

Some qualities that a new internal owner should possess include:

• Ability to lead and motivate people
• Entrepreneurial spirit
• Good communication skills
• Critical thinking and decision making
• Desire to own the company
• Willingness to assume the risks of ownership

Successors who possess these skills will be able to continue to grow the company to new heights and continued success.

Qualities to Consider in an External Buyer

The most common external sale options are a 100% sale to a third party or a private equity recapitalization (this occurs when a group of investors purchase a majority portion of your business while you retain some ownership). Similar to an internal sale, an external sale often includes an earn-out provision or some other form of seller financing as part of the transaction, and may require your involvement for a period of time. If you keep a minority stake, you may be fortunate enough to realize an additional gain if the business sells again in the future. In either case, you need to feel confident in the buyer’s ability to run the business profitably to secure your repayment.

Qualities to look for in an external buyer include:

• Proven track record of experience and success in business ownership
• Financial ability to make regular payments
• Concern for the current employees and customers
• Ability to understand and operate within the current company culture
• Personality you can work with if you will have continued involvement

Don’t Go It Alone!

Transitioning the ownership of your business is a process, not an event. Work with an ownership transition planner to determine whether an internal or external transfer is the best fit for your situation. In the case of an external transfer, a professional intermediary can help you find and qualify buyers that possess the critical skills we outlined above. Working with seasoned professionals will enable you to stay focused on running and improving your business while looking toward the future.