If you are a business owner ready to exit your company, there are several options when choosing who to sell to—one of the most popular choices being a third party. However, there are many factors to consider when selecting this exit plan.
When it comes to the sale of your business, you will want to consider how the buyer will impact the overall selling process and your future. If you are looking for maximum value and an exit within a year, then a third-party sale may be the right choice for you.
Consider all your exit options, along with the advantages and disadvantages of a third-party sale below.
Advantages:
- Financial
Because the purchase is not coming from an internal successor, sellers will likely receive the bulk of the purchase price at the closing of the sale. Additionally, because it is an external buyer, there is a greater chance for the overall purchase price to be higher, especially if it is a strategic buyer.
- Time
Overall, selling to a third party can usually take less time than selling to an employee, with the timeline coming in around a year. When selling internally, you may take more time securing financing, transitioning clients, and transferring overall operations.
- Value-Based Goals
When selling to a third party, children and family members who may have been considered the predecessors are treated equally and have the opportunity to be provided equal amounts of cash from the sale. As the business owner, you can also offer critical employees cash from the sale to show appreciation.
Disadvantages:
- Tax Consequences
Unless you take careful action before selling, you could face severe tax consequences. Be sure to review the main tax impacts based on entity and transaction type before choosing to sell to a third party to ensure you will still meet your selling goals.
- Financial Control at Closing
When selling to a third party, you lose control of the company at closing. If you do not receive the total purchase price at closing, you risk receiving the remaining payment in earn-outs or a secured promissory note, which depends on the company’s success after the sale.
- Culture Change
Overall, when selling to a third party, there will likely be a significant culture change when you exit, regardless of what the buyer says. The buyer wants to purchase because they think they can make a difference. If maintaining culture is one of your selling goals, you may want to choose another exit path.
There are many factors to consider when choosing to sell your business, and which exit plan is right for you based on your desired outcomes. If you think you are ready to sell your business, consult with us at Aberdeen Advisors to help you make an informed decision that aligns with your selling goals.