Editor’s Note: This is the third of a series of four articles about exit strategies for small business owners.
In the first article of our series we discussed how the old Chinese proverb “He who rides tiger must find way to dismount” relates to how business owners can prepare to dismount or exit the tiger of a business they have founded and ridden successfully for many years.
In the second article, we explored selling to “a member of the pride,” meaning either an employee or family member.
This article will explore selling to someone not belonging to the pride, meaning someone from outside the industry looking to own their own business. It could be the knight riding that white horse you envisioned, a poacher looking to pick up your business for a song, or more likely someone in between the two.
There are several advantages to selling a business to someone outside of the business and outside of the industry.
A major advantage is that you may find a buyer who has substantial resources, both financially and in terms of abilities to run a business. There are many people in corporate America who are being downsized or just may be fed up with the corporate life and working for “the man.”
They can bring new life and enthusiasm to a business in terms of being willing to invest in technology and marketing that is so necessary to achieve success.
Often these buyers have the ability to make significant cash payment to purchase the business and may have the ability to obtain outside financing as well.
As noted in the first article, most often the seller will need to carry back a portion of the purchase price to make the deal work. If you did not read that article, please do so because, although most sellers want all cash, it is most often not reality in selling any small business.
Moreover, carrying paper on part of the purchase price can have significant advantages for both buyer and seller if a fair and equitable purchase has been negotiated.
The right buyer from outside the industry may also not have the limitations of someone who is too close to the industry.
Certainly, almost all industries have changed substantially over the last few years, along with the skill set necessary for success. It takes strong talent in sales, marketing and especially business management to navigate the jungles we face today.
Many owners built their business in a time when “craftsman” expertise and hard work were more important than sales ability or the ability to read financials. Many of those people are now gone — either closed or consolidated/absorbed by another “pride.”
If that right buyer is found, the employees of the business being sold have the benefit of working with the new owner to move the business forward. This can help secure their jobs going forward. This is important to most of us, as discussed in the first article. We care about the future of the staff members we have worked so hard to develop over the years. In like manner, most owners also want to ensure their customers are cared for properly in a business transition
One final advantage may be that a buyer outside of the industry may be more open to understanding the fantastic opportunity available to those who “get it.”
By this I mean that there is a lot of fun to be had in an industry, even a mature, consolidating industry, with dramatic changes taking place. I feel the opportunity has never been greater for those who are willing and able to understand that we have to play by different rules than in the past. If one embraces the technology changes and learns to sell and market in a digital world, it can be fun.
There can also be fun in picking up the spoils (accounts from companies closing and/or buying a competitor) from the consolidation taking place in an industry. This offers a wonderful opportunity to grow sales and profitability. I find that experienced business people from outside of the industry often “get it” more easily than people within the industry who may be somewhat blinded by the past.
There can be some serious drawbacks or problems associated with selling to someone outside of the industry.
An obvious one is the difficulty finding a qualified candidate.
Businesses are complicated to run. And to keep the train moving down the track and making a successful transition can also be difficult. The buyer must have good people skills in addition to sound business management and good judgment.
You may ask, “Why do I care if I am no longer associated with the business?” You may not, assuming you were fortunate enough to negotiate an all-cash deal and if you have no concern about the future of the employees and customers. But again, if you read the first article in our series you may agree that all cash deals are hard to come by, and we do care about the future of the “tiger” that we put our heart into building.
We want the business to continue to succeed and leave a positive legacy.
Financing can be another drawback, depending on the assets of the business being sold and the financial strength of the new buyer. Credit markets have tightened and lenders are more cautious than in past years. SBA programs are available through some banks. Often some combination of bank financing and seller financing will be required. Complete and accurate financial statements from the seller and a strong business plan from the buyer in addition to his/her financial information are critical to obtaining financing.
The next logical question may be, “Where do I find a qualified candidate?” There are not many people looking at your industry as a dynamic and growing market they want to enter. This environment makes the search for qualified candidates difficult. There are business brokers that will list small businesses for sale. Usually they charge about 10 percent of the sale price in commissions, and they generally prefer larger-sized businesses. They may or may not be well versed in the opportunities in our industry.
If you are part of a franchise, you should have the ability to sell through your franchise headquarters. We helped many of our franchise members exit the business by finding new buyers for them. If you are an independent business, the business broker option may be one possibility to find a buyer outside the industry if you are willing to pay the commission. There are also some in the franchise community who are offering to put buyer and seller together and convert the independent business to the franchise.
The possibilities of finding a buyer for your business outside the pride/industry are greatly influenced by the profile of your business. Again, if you read the first article of this series, you may remember the points I made about how to properly position the business for sale. Basically, you need to run it like you never intend to sell it. The prospects to sell your business go up dramatically if:
You are profitable
You are growing
You have a staff of strong, capable employees
You have kept up with technology
You have “curb appeal”
You want a fair deal; not lopsided for either buyer or seller
If you have these attributes, you are well-positioned to dismount by selling your business. Perhaps not to the knight on the white horse, but to a well-qualified buyer looking for a future in a great industry.
Carl Gerhardt currently volunteers as a SCORE mentor/consultant to small business. Contact: cgerhardt@frannet.com.
