ENTREPRENEURSHIP / SEP. 01, 2014
version 2, draft 2

How to Cash Out of Your Business

No matter how much you love your business - built from scratch, purchased from a previous owner, or family owned and operated for generations - there may come a time when you simply want out. It could be for any number of reasons (Christine Comaford refers to the “Eight Ds” - disenchantment, disability, disagreement, disintermediation, debt, death, divorce, and disease - as the usual culprits). But how do you do it?

Thankfully, you have a few doors to choose from when it comes time to cash out of your business.

An Outright Sale to a Third-Party

Choosing to list your company for sale, waiting for someone to show interest, and finally make an offer is the easiest. Although it may take a long time, once you’ve sold it, you’re free and clear, able to enjoy the money you made, or to start your next business.

Selling your business has a lot in common with selling your house. You can go it yourself (House For Sale by Owner), or you can hire a business broker (like a real estate agent). Working alone means a bigger “cut” at the end, as a business broker receives a commission (typically 5-12%) from any sale they bring to closure. Of course, you get a lot of expertise when you hire one...they understand the legal and financial side of the sale in a way that you likely don’t, so it’s a trade-off. Regardless, you can next choose to list your business in newspaper classifieds (usually under “Business Opportunities” or “Businesses For Sale”), as well as online portals (including Kijiji and Craigslist). A broker will also have access to specialized sites and industry listings that you might not be able to utilize on your own. The write-up should describe your business in glowing terms. Be descriptive, Be honest. But don’t reveal too much about the behind-the-scenes stuff. 

According to the Wall Street Journal, any outright sale of an existing business falls under an assets (better for the buyer) or stocks sale (better for the seller).

An assets sale involves the tangible (facilities, equipment, stock, employees, customers) and intangible (trademarks, patents, reputation) assets belonging to a company. You sell them for an agreed upon price, and are done with it.

A stocks sale is selling the “company” itself, including the assets, but also potential legal issues and regulatory concerns, existing employee or third-party legal issues, and so forth. The stocks (if they exist) are usually a set value, and the sale price is often no more difficult than the number of stocks multiplied by the individual stock price (or thereabouts...everything is, of course, open to negotiation).   

A broker can help to explain the advantages and disadvantages of each. To find a reputable broker in your neck of the woods, simply Google “business broker [your city name]”.

Sell to Your Existing Employees or Managers

Another popular option, especially for well established businesses, is to forgo listing the company and searching for a third-party buyer by selling directly to your employees (most typically the management team). They may want to carry on without you, and they already understand and care about it, so there is plenty of reason to like this option.

On the other hand, much like the “hometown discount” in professional sports, you may feel obligated to accept a lower offer because you know them already. You’ve worked with them, possibly for years, and many of them might be friends more than just colleagues.

Alternatively, you might opt for an Employee Stock Ownership Plan (or ESOP). Under this scenario, you periodically sell your ownership stock to a trust of sorts, which then holds and provides these stocks to employees as part of their salary and benefits package. It actually works well once it’s set up and running (get proper legal and financial guidance to do this properly). It encourages employee loyalty, and gives them much more incentive to work hard (after all, they’re owners - however minor - rather than just employees) and go above and beyond.

Find a Partner

If you’re only looking to “cash out” financially while sticking around, you might consider advertising for a silent majority (or minority, or equal) partner. You can sell part ownership (usually around 50-50, although many investors might demand a 51-49% split so they have the deciding “vote”) while maintaining your current role and position with the business. It’s a great way to reap a quick and potentially profitable payout without having to sever all ties. Just be sure to explicitly state everyone’s role and responsibilities in writing so there is no confusion down the road. As with the other options, you can do this alone or hire the services of a broker (if they work these kinds of sales).

You’ll have to assign a value at some point. There are numerous ways to do so, some easy, some complex. Check out the links below for a few suggestions:

No matter which route you select, selling a business can be tricky and drawn-out. Be prepared for that, and don’t do anything drastic without thinking it through. A business, especially one you’ve either grown from nothing yourself or inherited from a family member, is worth more than just the dollars and cents you get for it. Don’t do anything you’ll regret simply for the money. The money is great, but so is the satisfaction of owning your own successful business.

 

Photo by Vic

Creative Commons License

 

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