Should I explore selling my family business?

Many companies with annual revenue between $10 million and $100 million are family-owned, and the prospect of selling can be overwhelming. The process involves a complex mix of short- and long-term professional, personal and financial issues. As a result, owners sometimes prefer to postpone addressing these matters rather than face them.

Some questions these business owners commonly consider include:
1. Will a buyer pay what my business is actually worth?
2. Will I have the option to stay on or transition out?
3. Can I risk having a customer, employee or competitor discover that I am exploring a sale?

While many business owners frequently check the value of their stock portfolios, they may have no realistic idea of what could be their largest asset, their company, is worth or what they can do to increase its value in the eyes of potential buyers. As the cliché goes, a business is worth what someone is willing to pay for it.

Factors buyers consider favorable when deciding on the type and structure of an offer include profitability, usually measured by adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); increasing and recurring revenue; limited customer and supplier concentration; barriers to entry; a loyal and satisfied customer base; and untapped growth potential.

These factors are associated with lower buyer risk, which can lead to a higher valuation and a greater percentage of the purchase price paid in cash at closing, rather than through contingent or “earn-out” payments tied to the company’s achievement of agreed-upon objectives after the transaction.

An experienced mergers and acquisitions (M&A) adviser can provide reasonable estimates of what a company might be worth under current market conditions. It is also beneficial to work with an experienced wealth manager, accountant and attorney to determine what steps can be taken before a sale to minimize taxes and make the due diligence process go more smoothly.

It is possible to sell 100% of a company and negotiate a very short transition period. However, opportunities also exist for owners who are not ready to retire but would like to take a substantial amount of cash off the table.

These owners may be able to leave day-to-day operations to the new owners while remaining involved in areas such as maintaining strategic customer relationships and identifying and evaluating additional acquisition opportunities. They may also work less than full time as an employee or consultant.

In these situations, the owner typically retains some equity, usually in the 5% to 20% range, and may benefit from a second sale in a few years, sometimes referred to as a “second bite of the apple.”

Keeping a potential company sale confidential is critically important to business owners. Word of a possible sale can negatively affect employee morale, harm customer relationships and embolden competitors.

Experienced M&A advisers know how to manage a confidential, well-organized process and establish appropriate safeguards. These include serving as the primary point of contact for interested parties and initially distributing a “blind” teaser that describes the business without identifying it.

The company’s name is disclosed only after an appropriate nondisclosure agreement is in place.

Gregg Schor is the CEO of Protegrity Advisors and advises owners of privately held lower middle market companies on mergers, acquisitions and succession planning. A resident of Bluffton, South Carolina, he works with business owners throughout the Southeast and across the country.