Sometimes, the family business will not pass to the next generation, even though the kids currently work in the business. There are many reasons why the kids do not want to take over the business. Reasons range from their current lifestyle is pretty good so they do not want to spend day and night being consumed by the business and like their free time to they want to make their own way in the world.
In many cases, this is a shock to dad or mom, but with careful planning they can sell their interest to other buyers. Below is list of some possible buyers of businesses besides the kids.
- The Strategic Buyer
Companies that are looking to expand into a new market or leverage your existing customer list for higher revenue growth are referred to as ‘strategic buyers’. The main advantage of selling to a strategic buyer is that your company could receive a higher purchase price because strategics will often pay a premium for businesses that fit into their existing business model or delivery platform. Higher purchase prices come at a cost because buyers will cut all redundant expenses. This will risk the jobs of your employees.
- Private Equity
Private equity groups (“PEG”) buy for financial reasons. The PEG will look to maximize their return on investment by purchasing the business at a discount, maximize profitability, and then sell at a higher multiple than they purchased the asset. Usually, all employees stay employed, but in cases of redundant expenses, the PEG will let employees go where they can save money.
- Individual Buying a ‘Job’
This is common for smaller companies, defined as total pre-tax profits of $250,000 and below. This buyer will analyze the cash flow ability of the company and match it to his personal needs. The buyer wants to know how secure the revenue is and can the customers be transitioned to him without a downturn in cash flow.
- Your Employees
Lastly, your employees may want to purchase the company from you. In that case, an employee-stock ownership plan (“ESOP”) will gradually transfer ownership from the ESOP Trust to the employees. Current ownership sells its equity stake in a leveraged ESOP transaction to an ESOP Trust and the ESOP Trust manages the movement of equity from Trust to the employees.
Mike Metzler, CPA/ABV, CMA, CGMA, ASA