Selling a Business: Does the Buyer Already Work for You?
Thinking about selling your business? When business owners start to think about selling, one of the many concerns (price, timing, financing, existing staff, etc.) is trying to find the right buyer; someone that will treat the business as the seller has. If you’re the owner, you may have started your business years ago and it may even have your name on it – literally, as well as figuratively. You would quite naturally hope that the buyer will not only be able to manage the business well and preserve its reputation – particularly if you were going to provide some of the financing for the purchase – but you might well be concerned that, without spending years on the effort, even with the help of a professional business broker, you will be unable to truly know if the ultimate buyer has a set of values similar to yours and will treat the business and its reputation as you would.
But what if there was a way that you could be almost certain the buyer would care for the business you started and grew just as much as you do? What if there was a way to easily identify a buyer with a set of values similar to yours and with a track record that clearly shows that this buyer would handle your business and its reputation as you have. Well, there may be. Your buyer may already work for you.
It Happens Regularly
That’s right. You may already know and trust the person that will eventually buy your business. He or she might just be one of your employees. That’s what Vess Barnes III realized when he started thinking about selling his family’s second-generation jewelry store in Amarillo, Texas. It turns out that the most qualified and logical buyer was his manager, Don Adams. (Check out the full story!) You may have a Don Adams working for you right now.
What does your management team look like? If you’ve set the business up and staffed it properly, it can probably run without you. That would suggest to me that someone – or more than one – on your management team can run the business. If the team has been in place for a few years, they are likely inculcated with values similar to yours and have more than a simple employment interest in maintaining the business’ growth, stability and reputation. And you can tell by their day-to-day attitudes, how they speak about the company outside of work and who they bring to Christmas party if they have truly “bought in” emotionally. This may be the perfect place to find your buyer.
But Can They Afford It?
One concern most business sellers have is how a buyer – especially your employee(s) – will finance the purchase. Well, there are a couple of issues to consider when selling in general and when the buyer is one or more of your employees some of these issues take on greater importance. Let’s look at a few.
- How To Set the Price. While you and your employee(s) may want to sit down over a beer and talk about what the business may be worth, it is almost always preferable that you hire a disinterested third party to estimate value. (A qualified business broker can do this generally at a lower cost than a business appraiser.) A reason to consider this is to avoid any unpleasantness down the road. If you and your employee come up with a number that both think is fair, it is not hard to imagine that, if something goes wrong a year or two after the deal is done, one party or the other may feel taken advantage of. When a value is established by a professional who has and will have no equity interest in the business, both parties are shielded from any acrimony related to price.
- Financing. First, bear in mind that the vast majority of small and mid-size businesses – some statistics suggest 80% or more – involve some amount of seller financing. If your employees are qualified to run the business, presumably they are qualified to buy it. However, they may not be qualified financially to secure the loan required to fully fund the purchase price. As the seller, you can certainly help. And, if you know that you will most likely have to help whoever the buyer is, wouldn’t you rather help someone that you’ve known and trusted with significant portions of your business for many years? Issues of how to protect your interest during the payoff period can easily be ironed out with the input of a professional business broker or an attorney.
When it comes to financing, one benefit of selling your business to your manager(s) is that they know the business, a fact that will likely play strongly in their favor when they apply for conventional or SBA financing. Lenders like to see that the buyer of a business has experience in the industry. A buyer that not only has that experience but also has spent years helping to manager the business he or she is buying is likely to garner multiple bonus points with the lender.
In our experience, most business acquisition agreements require the seller to stay on in a greater or lesser capacity for a certain period of time after the sale is completed. If your future buyer is your current manager (or group of managers), you already have a working relationship with them. You know each others’ styles and presumably have worked together toward a common goal for multiple years. Well, that goal is likely to remain the same under the new owners. This suggests that the transition will likely be smoother – possible significantly so – if one or more of your employees buys your business than if an outsider buys.
Is It Possible?
Admittedly, not every business has employees that would be good owners but that pool of talent should be one of your first considerations when the time comes to sell. Some of the people that help to manage your business probably know as much about its operation as you do and they may be just the right player to hand the ball off to. They may never have thought of themselves as “business owners” but they might see a once-in-a-lifetime opportunity if you were to broach the subject. If you’d like any advice on any aspect of this possible source of potential buyers, drop me a note at the email address at the bottom of this post.
If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!