Picture your Designed Destination… in it, have you transitioned your business to family or key employees? Or, did you instead sell or transfer the business to an outsider? Regardless of which option you have chosen, it’s important to allow yourself enough time and necessary resources to optimize your outcome.
When you arrive at the intersection of Inside vs. Outside business sale options, keep this in mind:
Choosing an Inside Sale. If you decide to transition your business internally, it is important to consider how the transaction will be funded. It is unlikely that your family member, partner or key employees will have the assets needed to acquire the financing necessary to buy the business. Designed Destinations, a book by Lawrence Ganim, provides specific examples of how to have addressed this issue with some of my clients. The goal of your Ownership Conversion Plan is to help your successor gain the capital and experience needed to approach financial institutions that could ultimately finance the sale. It is also very important to minimize the value of the transaction for tax purposes. At first glance, internal sales may seem to require less time to complete. But that is not always the case. While more time often results in a better outcome, be mindful that overemphasizing the transaction for too long can create impatience.
Opting for an Outside Sale. If you choose an outside sale it is important to find a qualified buyer, someone who knows what it is they want in your business. These buyers are often willing to pay more for what they want instead of haggling for a rock bottom price. Qualified buyers are especially attracted to move-in ready businesses and understand the benefits of paying more for those that are positioned for growth and continuity. A more attractive business can even drive an auction, increasing the potential payout for you as an owner. This is ideal because unlike inside transfers, when transitioning to an outsider the value of the transaction should be maximized. Depending on what you want or need, your Ownership Conversion Plan may also include a minimization or determent of taxes as well.
Remember that both inside and outside sales require time, so considering your options early on in your ownership conversion planning can protect you from unexpected costs or losses. The more time you spend planning, the less likely the IRS is to win!