Who Will Buy Your Business?

By Trip Holmes

As an advisor to middle-market family business owners, I routinely help founders plan for their eventual exit and retirement. There are many elements to building and executing on an exit strategy. You need to develop goals that are aligned with those of your estate plan, you need to plan for the growth of your business over time, and you need to develop succession and transition plans as well.

One of the fundamental questions that drives all of this planning activity is who will buy your business? According to a recent survey from the National Center for the Middle Market, a little over a third of middle market business owners (35 percent) sell to outside investors, while 31 percent have a next generation family member take over the company. About 18 percent make some sort of arrangement, either selling to or passing down to employees. Nine percent sell to competitors, while seven percent transition to an outside hire.

Look to the Kids First

So, what does it all mean? Your business is unique to you and the resources you have to draw from as you both build and transition your business. Most people rightfully look at their families first. Often, business owners must look elsewhere, because their children lack the interest or the know-how to run the company.

While in many cases, imparting the knowledge to run the business is quite doable, the child must desire to participate in the business to get this strategy off the ground.

Employees Often Come Next

Many business owners, who either don’t have children or have children who are interested in other professional pursuits, develop great relationships with talented employees. In some cases, these employees feel more like family, and they take over the business as naturally as any next generation child would.

In other cases, though, a group of employees—or all of them—take over the company through a controlling stake that stems from their involvement in a pre-planned employee stock ownership program. Depending on the circumstances, this can be an excellent vehicle for transitioning from the founder or founding family to the people that have the greatest vested interest in the health and long-term sustainability of the business.

Outsiders Can Make the Difference

Over half the time, business owners must go outside their known spheres of influence—their families and employees—and venture into the unknown world of private equity, individual investors, competitors, and outside hires. This can be scary, but don’t let the unknown get to you: that same survey showed that while 90 percent of middle market business owners had little no experience with mergers and acquisitions, more than 70 percent of acquirers lacked experience with M&A. That means you’re all in the same boat, in that you need good instincts, a good plan, and most importantly, good advisors to keep you headed in the right direction, achieving your goals based on valuation and viability.

The big takeaway for me here is that business owners can rest easy, as long as they’ve taken on the planning aspect of their exit strategy. With proper planning, you can keep your options open. Early on, you can test the waters with family members and then key employees, to see if you have in-house options. Then, if these efforts fail to produce any fruit or are not applicable to your situation, you can focus on a plan that builds value for outsiders coming in to take over when you’re ready.

As long as you are alive and well, it’s never too late to get some foundational planning in place.  Take care to control your destiny and shape your legacy, achieving the goals for your business while you’re still in charge, and for when you’re gone. Contact Sabre Capital today to get the conversation started.