Establishing an ideal buyer marks a crucial aspect of the exit process for business owners. In fact, narrowing in on the best candidate to take the helm after your departure defines how we package and market the business.
One pivotal step means determining if an inside sale or outside sale makes the most sense. Before jumping to conclusions, it’s important to understand the pros and cons of each option.
Let’s break it down.
In short, an inside sale represents a sale to someone already familiar with the business. This can include a sale to a current partner (or partners), family member or key employee. Employee Stock Option Plan (ESOP) also falls into this category. It encompasses a variety of options and takes different shapes but can include management buyout, Stock Appreciation Rights (SAR) and tax advantages for quicker pay off.
Basically, an inside sale is when you have a buyer or buyers who have seen the inner workings or are intimately currently involved in the operations.
Inside Sale Pros
Obviously the biggest asset is your existing relationship. Despite seeing the good, bad, and ugly they still want to buy. Depending on the dynamics, most times an inside buyer has a positive existing relationship with the employees and clients.
Because of their existing relationship with the business, they will see less risk in purchasing it. Less risk typically translates to a higher purchase price.
Inside sales give more leeway when it comes to structuring the sale. With more relaxed time frames and occasionally more notice, we can explore more creative solutions that often work to each party’s best interests. In that case, it’s a win-win.
Inside Sale Cons
While the buyer sees less risk in purchasing the business, the current owner typically carries more of the risk throughout the transaction. If a key employee steps up to the buyer’s table, it’s unlikely they have the financing available or cash to cover the transaction. While we can create creative strategies, the exiting owner will most likely carry the loan.
The other challenge boils down to determining if a key employee, exiting manager, or child makes the most sense to assume the role of CEO. Just because you share a last name or because a manager has done well overseeing a division doesn’t automatically mean success from the top decision making seat in the company.
As you can imagine, an outside sale pretty much represents everyone else. From the competition to investment groups to former business owners to larger companies, the outside buyer represents an external individual or group.
Outside Sale Pros
If securing the most cash in hand upfront ranks high on your priorities, the outside sale most likely is the route to go. Buyers will have more financing options or even cash to complete the transaction.
More often than not, this buyer group has run another company, understands the demands of running a business, and/or has a strong senior manager or existing infrastructure ready to step in. In short, you’re dealing with a professional.
Outside Sale Cons
The biggest drawback will be around perceived risk. Since the outside buyer doesn’t have the existing relationship with the business, vendors or employees the purchase to them means taking a bigger risk. More risk can mean a lower sell price.
Next you have the potential for clashing cultures, difficult transitions, or other challenges with an outside party coming into the leadership. This could drive off clients or key employees. There is also the reality that the buying entity has an entirely new vision for the company, purchasing only aspects of your business to further drive their own mission.
Lastly, identifying qualified buyers proves to be a bigger challenge. Every client is not the ideal client so all buyers are not the same. Finding a buyer that works well with the existing business culture, has money, has the risk tolerance and is ready to make a deal is by far the biggest challenge.
Optimizing Your Exit Strategy
This is only one of the many crucial steps and decisions that will define the overall success of your exit. In truth, there is no cookie-cutter answer which makes the most sense. Decisions are best made based on the business, industry, key stakeholders, and your objectives.
The key is to start early and work with an experienced team. At Exit Consulting Group, we partner with mid- to large-sized businesses to create and execute the best business exit strategy to achieve your unique goals.
As the largest asset you will ever sell, and for most owners their one-time shot at funding their retirement, it’s essential to sidestep common mistakes and maximize your transition.