How Third-Party Sales Work
Third-party sales can be a good way for owners to exit their businesses and realize significant financial gains. There can also be some risks associated with these types of sales. We walk you through them.
Presented by Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:
As a business owner, you are used to having control over how your business functions. That can all change during a third-party sale.
Advantages of Third-Party Sales
A third-party sale is the sale of your business to an unrelated entity. This might include private equity firms, strategic buyers, or even competitors.
Selling to a third party can be a good way to exit your business while realizing a significant financial gain. Several advantages include:
- Potential for a higher sale price. Third-party buyers often have more money to spend than family members or employees, so they may be willing to pay a higher price for a business.
- Faster sale process. Third-party buyers are typically more motivated to close a deal quickly, so the sale process may be shorter than if you were selling to a family member or employee.
- Tax Benefits. The sale can be structured so there may be tax benefits associated with selling your business to a third party, such as capital gains tax breaks.
- Avoids family or employee drama. Selling to a third party can help owners avoid the potential for family or employee squabbles that can sometimes occur during such a transfer of ownership.
- Access to new resources. A third-party buyer may have access to resources that you don’t, such as new markets, distribution channels, or technology. This can help your business grow and thrive after the sale.
Disadvantages of Third-Party Sales
There are also many risks associated with third-party sales such as losing control of the business, dealing with a buyer’s unreasonable demands, and the potential for mismatched expectations. Here’s a look at several others:
- Loss of control. When you sell your business to a third party, you lose control of the company. This means that you may no longer have a say in how the business is run or who is hired to work there.
- Increased risk. If you don’t receive the full price for the business at closing, your risk of receiving the balance through a promissory note or earn-outs increases significantly.
- Departure of key employees. Business owners who have not tied their staff to the company may lose value if key employees leave during negotiations. Having a formal incentive structure that uses retention bonuses, career development, and flexible work arrangements helps tie them to the business.
- Difficult negotiations. Third-party buyers may be more difficult to negotiate with than family members or employees. Often, they are focused on maximizing their own profits, which could lead to a lower sales price for you.
Tips for Selling Your Business
As the go-to person for big decisions, you are responsible for the consequences, whether they are good or bad. This attitude can be beneficial for the business’s success, but it can also position the business poorly for the future, especially if you plan to sell it to a third party.
Here are some tips to help you increase your chances at a successful sale:
- Do your research. By understanding the market for your type of business, you’ll be able to set a realistic sales price and avoid being low-balled by buyers.
- Seek professional advice. Advice from a financial advisor, business broker, or attorney can help you assess your business’s effective value and drivers, prepare you and your family for the transition, and negotiate the best possible sales price.
- Perform general housekeeping. Improve your business’s marketability by cleaning up your financial records, documenting your growth strategy and procedures, updating your marketing materials, and ensuring your business is running smoothly.
- Functioning without you. Buyers may require you to stay for several years if you make yourself too important to leave. Your business must be positioned to function whether you are present or not.
- Be honest with potential buyers. Don’t try to hide any problems with your business. Potential buyers will find out about them eventually, so it’s better to be upfront from the start.
- Be prepared to walk away. If you’re not happy with the terms of the sale, be prepared to walk away. With the potential for other buyers, you don’t need to settle for a deal that is not in your best interest.
Selling your business may be one of the largest decisions you’ll make as an owner. It can also be a rewarding one as you see the fruits of your labor live on. While a third-party sale can be a good way to avoid family drama and realize financial gain, there are some associated risks. It’s important to seek the guidance of a professional advisor before making any final decisions.
The information contained in this article is general in nature and is not legal, tax, or financial advice. For information regarding your particular situation, contact an attorney, or a tax or financial advisor.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at firstname.lastname@example.org.
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