Business Owners and Third-Party Sales: Pros and Cons

Fri, 10/05/2018 - 06:00


After business owners have set their goals, measured their Asset Gaps, and learned what they need to do to build and protect business value, they make a big decision: Which Exit Path should I take? At the outset of Exit Planning, many business owners believe that they’d like to sell their businesses to third parties. What is it about third-party sales that draws business owners to them, and what is the most common problem that prevents them from successfully pursuing a third-party sale?

In this post, we’ll examine two of the most common reasons business owners think about pursuing third-party sales as their chosen Exit Path. We’ll also examine the most common reason third-party sales fail for business owners.

Third-Party Sales: Perceived Pros

Think about some of the most successful business sales and mergers. Whether it’s Facebook buying Instagram for $1 billion or Google offering to buy Snapchat for $30 billion, a common presumption that business owners make when considering a third-party sale is that they can make the most money by selling to a third party. Typically, they’re correct: Of all Exit Paths, third-party sales tend to provide business owners with the most money the most quickly.

The First Pro: Money

For some business owners, third-party sales are most appealing because of the potential payoff. Unlike family members or key employees, third parties usually have the funds to pay for ownership in full. This can mean that business owners don’t have to submit to promissory notes or rely entirely on how the business performs after they exit for their financial security.

There are a few caveats, however. First, to receive a maximum payout, owners must first have their businesses in order. This means beginning to install crucial Value Drivers that all buyers look for in a business. This often requires the help of several different advisors, and owners often find that working with an Exit Planning Advisor to network with the advisors they need facilitates the process.

Second, most business owners understand that they probably won’t receive billion-dollar offers for their businesses. But often, business owners will fall into the trap of believing that their businesses are worth more than an objective buyer will pay. There are two things that owners should do to avoid this temptation:

  1. Get a professional appraisal. Many owners want to use an industry rule of thumb or their own personal estimate of value when pursuing a third-party sale. This can hurt business owners because an incorrect estimate of value can make owners think they don’t have to continue building business value. Business owners can obtain an accurate, professional valuation from a valuation professional or by consulting with an Exit Planning Advisor. Exit Planning Advisors work closely with business valuation professionals and can help owners find an appropriate professional to properly value their businesses.
  2. Get help finding qualified buyers. Even when owners have businesses that have maximum value, they can struggle to find the right buyer for their businesses. Buyers are rarely charitable with what they’re willing to pay for business ownership, and negotiating the right deal often requires professional help. Business owners can build a proper Deal Team by reaching out to an Exit Planning Advisor, because Exit Planning Advisors have networks of professionals who can guide owners through the sale process, from finding the best buyers to finalizing crucial sale details.

Though money is a common reason owners look to sell to third parties, it’s far from the only reason. Another popular reason owners like third-party sales is how much time they can save.

The Second Pro: Time

According to a BEI survey, nearly 80% of business owners want to exit their businesses within the next 10 years. A typical Exit Plan takes 5–10 years to create and implement if a business owner is starting from scratch. However, with the right strategies and Advisor Team, owners can reduce the time it takes to transfer ownership by pursuing a third-party sale.

Third-party sales benefit owners who want to exit their businesses as quickly as possible while still obtaining financial independence. Qualified third parties can usually provide business owners with the sale price more quickly than any other type of buyer. Sales to third parties also give owners the freedom to spend their time as they choose after they exit. Unlike sales to management or children, a properly executed third-party sale lets owners immediately begin their post-exit lives, since owners get all, if not most, of the money they’re owed up front.

Again, for owners to complete a third-party sale that allows them to exit sooner, they must know the amount of money they need for financial independence, have a professional appraisal of value, and have contact with qualified buyers. Without proper preparation led by an Exit Planning Advisor, the potential for maximum payout over minimal time can be permanently damaged. If the business isn’t ready, an owner can taint the marketplace.

The Biggest Con: Tainting the Marketplace

In terms of third-party sales, the biggest con is that owners can taint the marketplace. Tainting the marketplace means putting the business on the market for sale, then pulling the business off the market without selling it. When buyers see that an owner failed to sell the business, it serves as a permanent black mark on that business, regardless of why the owner takes the business off the market without selling. Tainting the marketplace is almost always a result of business owners desiring the two pros of third-party sales (maximum money and minimal time), failing to get a proper business valuation, and rushing the business out to market because they are ready to leave.

Commonly, owners first begin to taint the marketplace when they decide that they are ready to leave the business. Then, using a guess or rule-of-thumb valuation, they expect to get a certain amount of money in a sale. When they cannot find a buyer who will give them that amount—usually because the business simply isn’t worth the amount the owner asks—they pull the business off the market, only to find that even years after their first false start, businesses are less likely to offer the amount of money they’re looking for.

A proven way for business owners to avoid tainting the marketplace is to work with an Exit Planning Advisor. Exit Planning Advisors have the tools, networks, and resources to help owners properly value their businesses, find buyers who can help them achieve both their financial and values-based goals, and position them to exit on their terms.