Whether transferring a privately held business to family, employees, or a third party, there are multiple issues and options to consider.  For many business owners, their business is their largest single asset and may be the key to funding their retirement lifestyle.  How can a business owner get the funding they desire and still make the transfer viable for the transferee?

 

Step one is to have the business valued from a third party perspective.  How can you develop a good transfer strategy if you don’t have a realistic value for the item you are transferring?  Unlike real estate, businesses have high intangible components of value.  Industry rules of thumb (multiples of sales or cash flow) are averages of all the good and bad businesses that sold in a specific industry and will not capture the unique qualities and strengths of your particular business.  Strategic Endeavors LLC has outsold the rule of thumb value for a particular business by as much as 100%.  Relying simply on a rule of thumb may result in severely under-selling your business.

 

The answer after step one may be to build the business value to produce the income stream that a shareholder needs to retire.  Remember, a business is worth what a buyer is willing to and can justify paying and not what a business owner thinks he needs to retire.  If the seller’s needs cannot be met now, put a plan in action to take the business where it needs to be to achieve the seller’s goals.  This is why it is critical to start this process at least 3 to 5 years in advance of an anticipated exit. 

 

Maybe a two-step process can achieve the goal where a portion of the business is sold now (i.e. to a private equity group) and the seller partners with the buyer and takes advantage of the buyer’s resources to build up the recapitalized company to produce a much higher value for the portion of the business retained by the seller.  This portion is then sold in a second sale.

 

If transferring internally to family or employees, why should the selling shareholder receive less than if sold externally?  Is this fair to other family members that are not involved in the business?  Could creative financing strategies be used leveraging off of the trust and relationship the seller has in family members or key employees to achieve a transaction at a fair market value (but at other than typical market terms) that will fund the seller’s retirement lifestyle?

 

The point is, once an owner knows the value of his/her business, there are multiple options and strategies to transfer that value in a way that is equitable to all the stakeholders.  To identify the best strategy, a business owner should consult with a business intermediary that knows the market, a lawyer and accountant with mergers and acquisitions experience, and advisors knowledgeable in estate planning, taxes and wealth management.