There is always a fear that a trade sale to a rival will lead to job losses, perhaps even the closure of the entire business, as the new owners seek to boost profits by eliminating duplicated resources. This fear often pushes the entrepreneur towards considering a management buy-out, or even a zero consideration transfer of all or part of the company to other family members.
When advising a client facing this dilemma I always ask them to consider three important questions about their exit:
How do they see the timing of their exit? – do you want to leave right away or are you prepared to work on a full or part time basis for a period of time to facilitate the handover.
Who do they really want to sell the company to? – are you emotionally committed to a sale to existing employees or family members, or do you want to maximize value by finding a trade buyer that sees strategic gains?
How much money do they need to fund their future lifestyle? – a management buy-out or family transfer will probably mean a lower total consideration and payment on deferred terms over an extended period; can you really afford to wait for payment, and take the risk that things will go wrong?
The truth is that in most cases there is a tension between emotional and financial priorities. Employees and family members rarely have the resources to buy a company for cash up front. There is unlikely to be any post sale uplift of profit from cost reduction or cross selling opportunities that a trade buyer might enjoy, so a lower selling price is almost inevitable. Can you really afford to walk away from a higher selling price? Are you really prepared to wait five maybe even ten years for the full consideration?
You may be one of the lucky few that has built up considerable personal wealth outside the company and feels able to take these risks. You may be willing to continue working in the company in a less hands-on capacity for a number of years to make sure that things stay on track to meet your pay-outs; but this in itself is not a risk free option. For most entrepreneurs though, selling their business is the most important financial transaction of their lives. You will have taken considerable personal risks to build the company in the first place, are you really in a position to roll the dice again?
I try to encourage my clients to approach these difficult issues in the same way as they would any other business decision. Over the years spent building the business you will have faced many decisions that are a complex web of personal, financial, and practical considerations, and will have learned to balance the risks and gains involved.
Try and apply the same objective approach to this dilemma. Is the emotional gratification of doing the right thing really worth the potential losses involved? Putting feelings aside are you 100% confident that your employees and family members have the skills and drive to run the business on their own?
Can you afford the downside if the full selling price is never paid? The choice is yours.