If you are considering selling your business, you may be under the assumption—held by most small business owners—that selling to a third-party buyer is your only option. It is not. In reality, a third-party sale can be the most difficult to achieve and may not satisfy your objectives in two different categories:

  • Financial (how much money you need)
  • Non-financial (what is important to you)

Both types of goals must be considered.

Most likely, you have several different selling options, which need to be aligned with your financial and non-financial goals in order to accomplish a successful sale. There are 5 predominant sale options, some internal and some external.

Internal Sale Options

You can sell your business internally to someone inside the company: management, employees, or family members. In general, internal transfers provide a sale at a lower gross price but can produce a greater net sale price due to tax and fee minimization.

  • Management Buy-out or Leveraged Buy-out

The sale to your management team usually requires that either you provide financing in the form of a seller note in the case of the MBO or a bank provide the funds in the case of the LBO, for the purchase of your business. You may remain involved for a period of time.

  • Employee Stock Ownership

This type of internal sale does not actually sell the stock to the employees as the name implies but, rather, sells to a trust for the benefit of the employees. It can offer the greatest tax advantages and flexibility for an owner because you do not have to sell the entire company or relinquish control.

  • Stock Redemption Plan

This is a similar internal sale option as the management buy-out but can have many tax advantages, especially in the case of C corporations. Three key elements must be in place: company profits, ample time, and trust between the parties.

External Sale Options

  • Sale to a Third Party

This can be to an individual or another company and can provide the highest sales price, not necessarily the highest net proceeds. You generally will not be involved with your business after the sale.

  • Private Equity Recapitalization

This usually involves a group that represents investors who purchase a portion of your business, usually up to 80%, while you retain some ownership for a period of time. Private Equity Groups (PEGs) generally want an owner to remain involved for a period of 3‒5 years, at which time there is usually a sale of your remaining ownership interest. This can be an option for an owner for whom a third party sale is best but who wishes to remain involved with the business for a few more years.

Financial Considerations

When considering your selling options, the financial considerations are usually the focus and come with a false assumption that the higher the sales price, the better. In fact, most business owners have never stopped to consider how much money they really need to net from their business sale to achieve their financial goals. They have never done the math.

The key here is net which is defined as:

  • Gross sale price
  • Less the payoff of all liabilities
  • Add in retained assets
  • Less all selling expenses
    • Legal fees
    • Transaction fees
  • Less  Taxes
  • Equals NET proceeds

Two of these items, taxes and transaction fees, can cause the largest reduction in your business sale proceeds. Unfortunately, these items are not usually considered or calculated far enough in advance.

Non-financial Considerations

The non-financial issues are equally important and, if not considered, can contribute to a condition known as “seller’s remorse.” Seller’s remorse most often occurs when a non-financial need, such as the loss of feeling relevant or the loss of one’s identity that is closely connected to the business, causes a sense of emptiness and regret.

Identifying Your Best Option

There is no easy answer to this decision. It is a complex issue, which requires analysis and integration of your current situation with your future financial and non-financial goals. You must determine your best sales options and the steps required to achieve it through a comprehensive, holistic approach.

For an in-depth look at this topic, we encourage you to read Cashing Out of Your Business, where we cover this topic and more in much greater detail. Without the proper knowledge and advice, you may limit your options and your success in selling your largest asset: your business.

If you want to learn more about these subjects, and more, please download our free guide: “The 2013 Guide to Maximizing Value When Selling Your Business”