Exit Option Five: Sell to a Third Party

There may be emotional reasons for choosing any of the previous Exit Options (Transfer to Family, Sell to Key Employees, Transfer to Employees via ESOP and Sell to Co-Owners) but there are pragmatic reasons to examine the Option of Selling to a Third Party. This exit route usually offers owners the best chance at receiving the maximum purchase price for their companies. In addition, owners of larger companies who sell to third parties are best positioned to receive the maximum amount of cash at closing. Owners who top their list of objectives with, “Leave for Tahiti the day after closing,” initially choose this exit strategy. This route also appeals to owners who want to propel the business to the next level—on someone else’s dime.

Our list of advantages to choosing ‘Sell to a Third Party’ as your Exit Option looks like this:

  1. Achieves maximum purchase price
  2. Usually maximizes cash at closing
  3. Allows owner to control date of departure and
  4. Facilitates future company growth without owner investment or risk

This is undoubtedly an impressive list of attributes. However, before you grab the phone to call your favorite investment banker, let’s review the drawbacks of this exit route:

The first difficulty is that this exit route does not match the stated intentions of most business owners. If you look back at the survey results quoted in the blog “How to Choose an Exit Path”, just over half of business owners wish to transfer their companies to an ‘insider’, i.e., family member, key employee or co-owner.

Second, sellers to third parties may not receive all cash, or even substantially all cash. Much depends on the size and intrinsic strength of the company, and on the state of the Merger and Acquisition marketplace.

On a personal level, owners who choose this exit route must be prepared to walk away from their companies, but often not before working for the ‘new boss’ for one to three years. All owners who sell to third parties wrestle (with varying degrees of success) with the issue of losing a meaningful part of their lives.

Also lost in a sale to a third party is the company’s corporate culture or mission. As a Business merges with a competitor or is assumed into a larger entity, its culture and its role within the community inevitably change.

Last on the list of disadvantages is the owner’s perception that a sale to a third party means that employees’ jobs are at risk and that their career opportunities are, at best, limited and at worst, jeopardized.

This perception appears on the list of disadvantages because it is so widely held by owners of privately held companies. Extrapolating from the mergers and acquisitions that they see among public companies (which in fact, often do lead to massive layoffs) they assume that the effect on their employees of a merger or acquisition of their company will be the same.

In our experience, however, few employees lose their jobs. Employees may, and often do, choose to leave a new employer for reasons that have nothing to do with limited or diminished career opportunities. In fact, because larger (and often public) companies do the acquiring, employee career opportunities frequently improve. Compensation and benefit packages rise to the level of the larger organization. When competitors make an acquisition, they put high value on the workforce of the acquired company.

The disadvantages of a sale to a third party are:

  1. Inconsistent with original exit goal of approximately 50% of owners
  2. Loss of owner identity
  3. Loss of corporate culture and mission
  4. Receipt of a perhaps significant part of the purchase price subject to post closing performance of the company and
  5. Potentially detrimental to employees

Note that owners of smaller companies are less likely to close all-cash transactions and will likely have to accept promissory notes and a loss of control.

In the next blog, we’ll look at the Option of an IPO or Initial Public Offering.