Quite often when a vendor goes to sell a business they have had enough and want it sold in short order. The vendor assistance period (if any) is often quite short. Now in most business sales the vendors sell 100% of the business outright. However, there are times when a vendor could do better out of a business sale if they considered staggering the sale out over a few years by selling incrementally to a new owner.
Historically these arrangements have tended to take place when an existing employee has been identified to one day take over as owner. However, I believe that we will see proportionately more businesses that will consider an arrangement like this to maximise the price they get.
One of the downsides of a standard business sale process is that potentially the buyer pool can be limited. Say a business is worth $1m and is listed at that with a broker. Unfortunately, not all potential buyers have $1m in the bank, or access to enough finance. Now this is a generalization, but more and more people in the business buying phase of life are closer to the start than the end of large home mortgages. They have not benefited from strong real estate markets so they do not have a lot of equity built up. So that limits the buying pool.
Here are a couple of advantages to selling a business over time in this manner:
- Over the years that the vendor is still a partial shareholder they are still making their share of ongoing profits – they may have missed out on some of these had they sold outright.
- A deal like this may allow an element of vendor finance. If a deal like this is available it may make the buyer pool larger, which may make the business more valuable.
- This offers the ability for a smooth transition between owners as the new owner is really embedded in the business before the original vendor completely sells out.
- Where a business is heavily dependent on the original owner then it is a way to achieve a much higher sale price than would otherwise be the case in an outright sale.
Yes there a few downsides as clearly a business sale arrangement like this is going to take much more work than an outright sale. Here are a couple:
- The process is more complicated and takes more time. It means the vendor is tied up with the business – they need to ensure they leave a few years to exit slowly, rather than waking up one day and deciding they will list the business.
- The vendor retains the risk of being in business – if performance drops then they may earn less from the sale.
- Finding the right buyer who you can transition ownership to (and who you can work with daily) can be a challenge.
I believe there is a growing untapped pool of business buyers out there. People who have the skills and desire to own and run a business, but do not have the equity and need a way forward to be able to buy.
If you are thinking about exiting your business, then you may have more options then you realised. Involving a minority shareholder is a significant decision but one that should be considered as part of any succession planning process. It may give you more in the bank, a steadier handover process, and the ability to ensure your ‘baby’ is in good hands before you close the door for the last time. Getting great advice about your options is key.