An exit strategy to sell a business requires a motivated buyer to match with a motivated seller. Potential business buyers come from a spectrum of demographic groups. Each group has its own unique set of advantages & disadvantages as a negotiating partner in a transaction involving the sale of a privately held company or family business.

The following are the six types of business buyers an entrepreneur can potentially complete a transaction with when implementing an exit strategy to sell a business:

1. Family – Many entrepreneurs envision a scenario where the product of their time, effort, and business acumen is transitioned to a child or family member. This exit strategy vision is achieved frequently by business owners with help from trusted legal & accounting professionals and potentially a business intermediary. The primary advantages of this exit strategy are continuity of a family asset, the ability to transition executive management to someone who values the history of the business, and selling the business to a party current ownership has an emotional & mental attachment to on a personal level. The potential disadvantages of selling to a family member are the inability to negotiate “arm’s length” to achieve the best possible financial outcome from the sale, capital available from the buyer to contribute to the purchase, and emotional & mental issues that need to be addressed in the sale involving one of more family members. It is our general recommendation at IBA that sales to potential family members be explored first when implementing an exit strategy related to the sale of a business to mitigate the potential for family issues if a sale is pursed from a party from a different demographic group.

2. Employees – It is common for employees to admire & emulate the owners they work for at privately held companies. This is true because entrepreneurs are often charismatic, dynamic individuals who symbolize the professional success and achievement desired by the employees. This can result in a mutual desire to transition ownership from founder/mentor to prodigy. The primary advantages of this exit strategy are continuity of ownership in the business family, the ability to transition executive management to someone who values the history of the business, and selling the business to a party current ownership has an emotional & mental attachment to on a personal level. The potential disadvantages of selling to an employee are the inability to negotiate “arm’s length” to achieve the best possible financial outcome from the sale, capital available from the buyer to contribute to the purchase, and emotional & mental issues that need to be addressed in the sale related to the history between the parties and/or other employees who desire to purchase the business and/or their relationship with the present or future owner. It is our general recommendation at IBA that sales to potential employees be explored just prior to reaching agreement with an external buyer when implementing an exit strategy related to the sale of a business to maintain confidentiality in the potential sale as long as possible and mitigate potential issues for the business if a sale is ultimately completed to a party from a different demographic group in terms of staff, customer, or vendor turbulence. This exit strategy is commonly best achieved under the guidance of an experienced business intermediary with the ability to facilitate negotiations with multiple parties simultaneously.

3. Competitors – It is logical for business owners to think of competitors as potential buyers for their business when implementing an exit strategy for the sale of a business. The reason for this train of thought is that the acquisition likely would enhance the competitor’s position in the market and/or add tangible or intangible assets the business owner has identified can be improved in the competitor’s business. It also offers an exit strategy where the time & effort necessary to transition executive management of the business would be reduced and easier for the exiting owner. In a perfect world, mergers of competitors can result in a positive outcome for both parties. However, the path to sale to a competitor also has the largest inherent risk for the seller if a transaction is not completed. This risk is created because in a properly facilitated transaction a buyer will be allowed to complete a comprehensive due diligence about the company being acquired prior to completion of the transaction. Due diligence traditionally includes an evaluation of customers, suppliers, employees, equipment infrastructure, and inventory. In essence, the competitor evaluating the acquisition will gain insider knowledge on the secret recipe behind the success of the business being sold. This can enhance the motivation to complete the acquisition; it can also result in risk to the business if a transaction is not completed. It is recommended an experienced business intermediary be engaged if a sale to a competitor is desired given the high risk/reward components of the negotiation. There are numerous examples in the mergers & acquisitions historical record of successful mergers between competitors. There are also many examples of companies using a potential acquisition of a competitor to gain confidential information and competitive knowledge and not completing a transaction.

4. Customers/Suppliers – A transaction where a customer or supplier buys a business partner is called vertical integration. A transaction of this nature can make business sense for both parties. Similar to a sale to a competitor an exit strategy employing a customer or supplier has inherent risk. The risk associated with a sale to a customer is that the customer will have the ability to assess their importance to the company for sale and understand the profit margins associated with the products purchased. This information can be used for leverage in future negotiations if a transaction is not completed. Increased knowledge of the importance of the business relationship will also be gained by a supplier who does due diligence on a customer as a potential acquisition. It is our professional opinion at IBA that a sale up stream to a supplier in the present economy is generally a more attractive acquisition opportunity than a sale downstream to a customer. One of the reasons this is presently true is the increased ability of manufacturers and distributors to sell direct to end users from internet based retail platforms to achieve superior profit margins on products & services sold. It is recommended an experienced business intermediary be engaged if an exit strategy through vertical integration is desired to insure the proper attributes of the company for sale are highlighted in a persuasive marketing presentation. The sale of the intangible assets of a business (e.g., goodwill) is a sophisticated, nuanced process that requires knowledge, experience, and strong communication skills. Parties lacking the ability to “paint” the proper image of the acquisition opportunity frequently leave dollars on the table at time of sale.

5. Market Buyers – General buyers in the marketplace looking for businesses to acquire come in many forms. These parties can range from individuals to private equity firms to private & public companies looking to enhance and/or diversify the products & services they offer their customers. Entrepreneurs can successfully execute an exit strategy to any of them by following procedures & processes appropriate to achieve the best possible outcome. The procedures & processes include properly preparing & valuing the business before it is introduced to the market; maintaining confidentiality during the sale process and properly financially qualifying the buyer prior to disclosing information; professionally presenting the attributes of the business to potential buyers; facilitating the exchange of information between parties & negotiations; and insuring all proper legal & accounting components of a business sale are completed during the transaction process. It is recommended that an experienced, knowledgeable business broker be employed by a business owner wishing to sell a privately held company or family business to insure a competitive market is created for the business and the best outcome achieved.

Transactions are completed monthly in the Pacific Northwest involving all the types of buyers described in this article. Identifying the correct buyer to achieve the best possible outcome when implementing the exit strategy associated with selling a business requires an appropriate assessment of the situation and market conditions.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.