For many business
owners, the best monetization path will be to sell the business outright. [1]
The structure and terms of a sale transaction will be a function of your
personal objectives (staying or leaving, etc.), the availability of interested
buyers (strategic, financial, or new owner/operators), and the currencies they
have on offer (cash, notes, earnout, stock or a combination). [2]
Here are some interesting success stories:
- A janitorial services company – This independent operator was sold to a national strategic buyer in the same business for several million dollars in secured seller notes. Although the buyer was prepared to pay cash, the seller, retiring from the business, chose notes with an above market interest rate to minimize his reinvestment risk and to avoid the temptation to spend the proceeds.
- A software implementation services company – This founder-run company was acquired by a publicly traded strategic acquirer for $5.2 million in cash plus an 18-month earnout based on future performance. The founder, who continued to run the business as a division for the acquirer, received an additional $3.7 million through the earnout period and continues as a successful divisional president for the buyer.
And here is an example of a sale which did not work out so well:
- A diagnostic testing laboratory – The buyer was a new operator with relevant but not direct experience in the laboratory business. The seller received cash and seller notes subordinated to the buyer’s bank loan. When the business later lost its largest customer, the buyer could not service all of the debt and the seller was forced to accept a reduction in the value of the seller notes.
Unless you are selling for all cash, choosing an acquirer is like choosing a partner – it should be done
very carefully.
[1] This is the seventh and final article in a series illustrating various ways to “monetize your equity.”
[2] This article is intended for informational purposes only and does not represent tax, accounting or other professional advice. Please consult your own professional advisors before taking action based on the information presented herein.
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