By: Patrick Ungashick
Business owners who aspire to sell their company to one or more employees or partners are usually excited by that possibility. Selling to an inside buyer, such as one or more of your business partners or employees, can be deeply rewarding. Long-term, valued co-workers become like an extended family to many owners. To see the company continue forward, under the leaders you selected and developed, ensures that your company continues forward in good hands, led by people who share your values.
Despite these advantages, successfully selling to an insider buyer can be difficult, with no guarantee of success. Issues and questions like valuation, financing, and management succession make an internal sale a fragile exercise within even the strongest companies. To help evaluate the feasibility and desirability of selling to an inside buyer, ironically it can make sense first to investigate selling the company to an outside buyer, such as a strategic competitor or private equity group. There are five reasons why:
- Gain Clarity Around What the Business is Worth
When selling a company to an inside buyer, the question of valuation can make or break a successful outcome. Obviously, with the sale of any asset, the seller seeks a higher number, and the buyer wants to pay a lower number. That reality alone creates tension in the process. However, unlike when selling a home or car, when it comes to a privately-held company, often the seller and the buyer have little objective data of what the company might be worth in the open market. This hinders both parties’ ability to navigate through the valuation question and reach a sustainable outcome. Investigating an outside sale can gain an approximate understanding of what outside buyers would pay for the company based on its financial performance and current market conditions. (Note: this is not the same as getting a business valuation.) This market-based data then provides both parties with an independent benchmark for the company valuation to factor into their discussions and negotiations.
- Determine the Desirability of an Inside Sale
Investigating selling the company to outside buyers helps determine how desirable it may be to sell the company to inside buyers. Researching the external market can reveal factors that make selling the company to your employee(s) less or more desirable. For example, if you learn that outside buyers are scarce, or perhaps dominated by a few players that you don’t want to sell to, then an internal sale may become that much more preferable. Conversely, if you learn that outside buyers may pay a much higher price than expected, or may offer synergies that present transformational opportunities to your company, then selling to an outside buyer may suddenly become more attractive. There’s no way to know without looking. If you don’t look, the run the risk of one day wondering and regretting this unanswered question.
- Determine the Feasibility of an Inside Sale
One of the biggest questions that arise when contemplating selling a company to one or more employees is how will the employee(s) pay for it? Most employees lack two things: cash and collateral. (If the employees had either, they probably would not be your employees.) Without cash and collateral, selling owners are left to contemplate entering into a deal heavily or entirely dependent on owner financing—perhaps every seller’s least favorite two words. Researching an outside sale can present financing strategies and resources that aide the inside sale and reduce owner financing. For example, bringing in equity investors to take a minority position and fund the current owner’s exit is an option than many owners do not know exists. Having conversations with advisors, lenders, and investors can surface strategies and resources that make the inside sale more feasible and attractive.
- Lessen Negative Emotions
Selling a company is an emotional event for any business owner. Selling a company to one’s employee(s) is typically even more emotionally intense than selling a business to an outside buyer. For the employee(s), purchasing the company that they work at is also an emotional experience. All of these emotions can be positive: excitement, hope, enthusiasm, etc. The emotions can also stray into negative aspects: distrust, fear, concerns about risk, etc. Researching an outside sale before committing to the inside sale can reduce the potential for destructive emotions if and when the inside sale is pursued. For example, knowing the company’s potential value to an outside buyer reduces the risk that employees will feel their boss’s asking price is unreasonable and/or unjustified. The employee(s) contemplating buying the company may still not like the idea of paying that price, but it will difficult to conclude the price is unfounded or that the boss is “trying to screw me.” Knowing what outside buyers may offer and require also brings objectivity into questions about deal terms and structure, market timing, personal guarantees, and other issues that have potential emotional impact in an inside sale.
- Know Your Plan B
Pursuing and successfully implementing an inside sale is difficult. If you have researched an external sale and know what it may offer, you will have a clear understanding of your Plan B should the inside sale not come to fruition. This is critically important. For example, if you have done your research and know that an outside sale may be feasible and attractive, then you can pursue the inside sale with the knowledge and comfort that should it not come together, you can pivot into an outside sale to achieve your exit goals. Alternatively, if you know that an outside sale is unattractive and/or unfeasible, then you know that you are dependent on executing the inside transaction, either with the intended employee(s) or new ones that you may have to find. In either situation, knowing your Plan B creates clarity and aids in achieving your desired outcomes.
How Far to Go
Investigating selling the company to an outside buyer may be easier than it sounds. In many cases, the five advantages described above can be secured by meeting with advisors qualified to fill in the blanks for you on what selling to an outside buyer may offer. In some situations, it may be necessary and advantageous to take the additional steps of meeting confidentially with a small number of potential buyers to hear what they have to say. Use caution, however, particularly if the potential buyers are industry competitors. Work closely with your team of advisors to make sure you do not say or share anything that could hurt the company or backfire in your exit planning.
To many owners, the extra work of investigating an outside sale seems counterproductive, and perhaps even disingenuous to your stated intentions to sell the company to your employee(s). But when it comes to your exit, doing the homework and researching your options is essential. Spending some time understanding the outside sale can make the inside sale ultimately more successful.