So, you’re thinking about exiting your business. It’s a big decision, and here I want to help you navigate through the range of options you have as to how you exit.
Exit discussions often center around the outright sale of your business. We will cover that, but also discuss many different options to consider. Some of these options might be well suited to your business and size of the company, while others less so. This is a general overview to broaden your consideration to approaches other than selling outright.
Show Me the Money: Selling Your Business
We start here because this is often the default approach. You know your family isn’t interested in getting involved, or you’re keen on making a fresh start. Selling your business is often the quickest, best bet.
Let’s assume you want to sell the entire business. Other options, below, cover how you might sell down your shareholding. Even if you want to sell 100% of the business, there are still important options for you to consider, which I cover below.
Actually, the first thing to check is this: is your business saleable? Not all businesses are worth anything to sell. There are even deals where the buyer pays $1 for the business. But quite a lot of small businesses, particularly ‘one-man bands,’ cannot be sold. There is nothing to transfer. No assets, no intangibles, not even any customers. Your only real exit option is liquidation.
Sell to a Strategic Buyer
This is something of the fairytale version of exiting your business: find a larger company in your industry that sees value in your business and is willing to acquire it for moonbeams (a technical term meaning the price is way more than the business is actually worth). Yes, it can happen. But, it probably won’t.
See a more detailed discussion in the blog “What is a Strategic Buyer?“
Sell to a Competitor
A competitor may be interested in acquiring your business to expand their market share, customer base, or product/service offerings. This doesn’t mean they will necessarily overpay for your business, but you can often effect a faster sale as the buyer knows what they are looking at and can zoom in on the key attributes of value. In many cases, when a firm is acquired by a competitor, it is absorbed entirely. The brand and unique identity of your firm is lost. This doesn’t sit well with some business owners when selling.
Pitching your business at competitors can get a great result if more than one is interested. With the right business, you could set off a bidding war.
Business owners are too often reluctant to market to their competitors, with the typical concern being the competitor isn’t a serious buyer, and they just want to see ‘under the hood,’ steal ideas, staff, and customers.
Sell to a Financial Buyer
A financial buyer is someone interested in buying your business as a financial investment. This includes private equity (PE) firms, venture capitalists (VCs), or individual investors/syndicates. From time to time, we see a PE firm do a roll-up of companies in a particular sector. VCs invest in early stage companies (start-ups). High-wealth families or syndicates are usually either after firms with strong cash flows, or a sector they have a strong affinity with.
I have a fuller discussion about financial buyers in my blog here.
These investors are typically well informed, and are looking for bargains. They will not pay over market value (and lower if they can) unless you have a truly unique business – in which case we might consider them to be a strategic investor.
You need to have a good business with strong, sustainable results to be appealing to most financial buyers. The cost of the acquisition is a big concern for these investors, so they would rather look at firms with EBITDA above NZ$1M pa. They will typically require a period of exclusivity from you to undertake due diligence and finalise the deal, so you can’t as easily generate a bidding war.
Sell to Your Employees
A management buyout (MBO) can be a great solution when you have a capable management team, passionate about the business, and who want to see it grow and continue to thrive as an independent firm.
From your perspective, an MBO can be an appealing exit strategy. It’s a path that holds significant advantages, especially when you have nurtured a high-performance management team.
First and foremost, selling the business to the management team can align with your desire to see your legacy live on. It offers a sense of continuity, knowing that the company will remain in the hands of those who best understand its inner workings and share a deep commitment to its success. An MBO can be particularly appealing to you after the time and energy you have poured into building the business.
MBOs generally provide a smoother transition. The existing management team is already familiar with the company’s culture, operations, and customer base, reducing the potential disruptions that can come with an external acquisition. They know the risks and history of the business, and are therefore more likely to buy the equity in the business rather than the assets, which can provide a more tax-efficient return to you. The continuity can also reassure employees and customers, promoting stability during the transition.
An MBO allows you to sell down your ownership over time before selling out completely. You have the opportunity to maintain some involvement, whether as an advisor or with a continued financial stake in the company’s success. You may find this continued role fulfilling, and give you a reason to remain engaged.
While there may be other employees that could buy the business, we generally see this approach being led by some or all of the senior managers. The management team may also invite other employees to participate in the deal.
Sell Your Job
The vast majority of small New Zealand businesses are basically a form of self-employment by the owner. People for whom we mightn’t use the term entrepreneur. They aren’t creating anything new, aren’t innovating their business models. They created (or bought) a job. The firm might have a few employees, but it only works financially if the owner is the boss: there isn’t enough profit to employ someone else as general manager.
If you are one of these firms, when you come to sell, you are basically selling your job. The buyer will be someone wanting to buy a job. Cashed-up expats returning to New Zealand, recent immigrants, corporate refugees, people wanting a ‘lifestyle’ job, and those that can’t work under the yoke of employment. They will run the business, and at least at the beginning, will work full time in the business. These buyers are buying the Seller’s Discretionary Earnings (SDE) earnings stream.
To sell this type of business, you can either go through a Business Broker, or sell it yourself.
Sell Through a Broker/Intermediary
The typical intermediary involved in selling businesses in New Zealand are business brokers. For larger private businesses, there are specialist advisors – generically called merchant banks or similar. They operate on slightly different models, and generally different parts of the market. The Merchant Banks tend to sit in the space where transactions are above NZ$5M. Business brokers are always trying to push into the ‘bigger end of town,’ with varying success, and from time to time the Merchant Banks go below NZ$5M – particularly when the market is tight. Merchant Banks also compete with most tier-1 (‘the big 4’) and tier-2 accounting/audit firms, who have specialist teams involved in intermediating transactions. Deals at this level tend to have multiple advisors on both sides, and their advisors will also provide assistance in raising debt or equity to fund the deals.
So odds are you will be dealing with a business broker if you use a third party. We have previously discussed the New Zealand Business Broker model, so we won’t repeat that here.
Business brokers are real estate agents, although many buyers and sellers don’t seem to understand that. The business model brokerages generally follow is the same as other real estate firms. Brokers work on a success fee basis – no sale, no fee. The fee is a sliding scale based on the value of the business. For transactions under NZ$2M, you will pay in the ballpark of 7-10% in commission. This is roughly (and simplistically) split 50% to the salesperson/broker, and 50% to the brokerage. If there is more than one broker involved, they have to agree how their 50% is split. To a large extent, you as the customer don’t really need to have visibility of this.
To engage a broker, you need to give the broker’s firm authority to sell. This is called a listing agreement, and is a legal contract. Pay attention to the terms (clauses). I always recommend my clients have their lawyer review the contract. While they are very generic, you need to appreciate what you have agreed to. The listing agreement will generally be a sole agency – meaning you can’t engage anyone else to sell your business during this period. At the end of the sole agency period, the agreement will typically convert automatically to a general agency. Once it is a general agency, it can be easily cancelled, and other brokerages can represent it (if they obtain a general listing agreement signed by the vendor). The sole agency period for a business sale is generally six months (180 days).
Make sure you understand what sole agency means – if anyone buys the business during the exclusive period, you (as vendor) need to pay the commission to the brokerage. Therefore, if you sign two agency listing agreements running concurrently, you run the risk that you might have to pay two commissions. Further, if you find a buyer yourself during the sole agency, without the involvement of the broker, the commission is likely to be payable. You can attempt to ring-fence certain situations like these out of the listing agreement, but the brokerage needs to agree before signing the contract. This is the sort of thing your lawyer will also point out.
At the end of the sole agency period (unless extended), the broker should provide you with a list of names of the people/companies that they have ‘introduced’ to your business as a potential buyer. Many of these will have been behind the scenes interactions that you were not even aware of. Most listing agreements require you to pay the agency commission if you end up selling to any of those parties in the following 6 to 12 months, even without the brokerage’s further involvement. This is intended to prevent you from ‘running down the clock’ on a listing agreement, and selling to one of the parties the broker introduced, in order to avoid paying the commission.
Another thing to keep in mind is that while the commission is success-based, you will be expected to pay certain costs upfront. In most cases, these will be marketing expenses. Some brokerages will charge for the initial appraisal, and some charge for the ‘Information Memorandum.’ Where these items are charged in advance, they are generally deducted from the final commission when the business sells. Make sure you understand upfront that these fees are, and what they cover.
Sell It Yourself (For Sale By Owner, FSBO)
There is nothing preventing you from selling your own company. You just need to take the role of the broker: setting the asking price, producing the marketing material, advertising the business (e.g., on TradeMe), deal with buyer inquiries, showing interested parties around the business, receiving offers, negotiating the contract, and then hand over the business to the new owner.
While you will avoid the broker’s commission, all of this activity can take a considerable amount of your time. Further, many buyers are uncomfortable dealing directly with the vendor, ruling out consideration of your business as a result. Buyers also see FSBO sales as an opportunity to drive down the price. Since you are not paying a broker’s commission, the buyer will want to take some (or all) of those savings.
Don’t underestimate the marketing reach of business brokerages. These intermediaries exist because they generally add value to both buyer and seller.
Passing the Torch: Family and Succession
Have you considered transferring the business to a family member? This can be a great method to keep the business in the family, for you to stay involved (albeit in a reducing role), and effect a smooth transition.
If you have one or more family members interested in taking over the business, you can transfer ownership to them over an agreed period of time. You gradually step back from an active role.
This approach typically has significant family implications. Those family members not stepping into the business may feel financially disadvantaged by the deal. In extremes, this can cause estrangement within the family. To make this inter-generational transfer effective, you will need to carefully plan the implementation, and look at the financial arrangements of the deal to ensure it is equitable to all affected family members.
As New Zealand has no gift duty (unlike many other jurisdictions), there are no direct tax implications on the transfer of shares at any agreed value. Nonetheless, you should seek tax advice when considering any transaction.
The Buy-In: Gradual Sell-Down to a New Working Owner
If you are in no rush to leave your business, an effective way to plan and implement your exit is through a gradual sell-down to a new working owner. This approach involves identifying and grooming a successor who can eventually take over the reins of the company while you gradually reduce your involvement. This approach generally takes between 18 months and 5 years to effect.
The first step is to find the right candidate with the necessary skills, vision, and commitment to maintain your business’s success. While this could be a trusted employee or family member, we will here focus on bringing in an external party interested in buying into the business, and stepping up to the leadership role. The transition can start with the new owner taking on increasing responsibilities over time, allowing them to learn the ropes and build relationships with key stakeholders. The financial part of the deal should generally wait until this new person has proven themselves, and demonstrated their commitment to the business and the deal.
It is essential to be very clear with this new person what the timeline will be, what KPIs they need to deliver on, and the fundamental financials of the deal. I have seen too many of these types of deals go pear-shaped because the parties are not aligned on their understanding of what is going to happen, and when. The incoming person needs to understand they are not the boss during the first part of the process, and that you are still in charge. You should expect to pay them a salary during the first stage, but nothing so generous that they are happy cruising for 6 months in high paying job where they have no intention of closing the deal. If the relationship works, they demonstrate an affinity with the business and its clients, and are enjoying the business, then after 6 – 12 months they need to buy their first shares. A stake around 20 – 25% of the firm is a good first step. It demonstrates commitment, and they are putting their money where their mouth is.
Unfortunately, one of the risks you need to accept in this approach is that after their initial trial period, they may opt not to buy in. They leave, and you are back to the start.
This type of gradual buy-in/sell-down often relies on you financing a considerable portion of the deal. This is what makes the deal work, as it eases the financial burden on the buyer. It is crucial to have a clear legal loan agreement in place that outlines both the loan terms and the terms of the leadership transition, ownership transfer, and any potential contingencies. A common fear the vendor has is that the buyer runs the business into the ground and never repays the loan.
Another important requirement for this model to work is to have a fair and transparent business valuation of the business undertaken at the outset, and that locks in the price the buyer will pay.
There are quite a few moving parts to make this model work, but if managed properly, this is a very effective approach to exit.
A Sad Goodbye: Closing Down
In some cases, selling might not be a viable option. You may not have time for a gradual buy-in, the business may be too tied to you as owner for anyone to see value, or the business simply may not performing. Your lease may be coming to an end, and your landlord will not renew. You may have lost the distribution rights to a product range that was the cornerstone of the business and its brand. Therefore, when you decide to exit, you will need to shut the business down. This can take a number of forms.
Gradual Wind-Down
As you approach your exit, for example your retirement, you can just start taking things slower, reducing your costs in step with revenues, selling off assets as you close down product lines, selling inventory at reduced prices. You stop attending trade shows and many industry events. You may reduce your hours. Gradual wind-downs let you reduce your involvement while maintaining cash flow.
Liquidation and Receivership
If you can’t make a gradual wind-down work, and can’t sell the business, you may end up in a liquidation or receivership situation. The outcome is essentially the same, but the mechanics are quite different.
In a liquidation, you sell off your company’s assets, stop providing goods and services to customers, settle the firm’s debts and close the business. You could choose to liquidate the business quickly, or over a few months. The more time you have to sell off the assets, the better the price you receive is likely to be. Of course this needs to offset against the continued cost of rent, power, and even some employees through the shutdown. If you are in leased premises, you probably also need to allow for ‘make good’ costs – returning the premises to the condition at the start of the lease. If your lease isn’t about to expire, you may also need to find a way to step away from this liability, such as sub-letting or a negotiation with the landlord.
The liquidation approach leaves you in charge through the shut down. In a receivership, an independent third party (a receiver) is appointed by a court or a creditor to take control of the company’s assets and manage its operations and (in most cases) shut down. The goal of receivership is to protect the interests of creditors: first the secured creditors, and then the unsecured creditors. As a shareholder, you are an unsecured creditor, so you are at the end of the queue if there are sufficient funds. Receiverships are a legal process, and you generally will not be involved in the process.
In most cases, the receivers will aim to shut a non-viable business down as quickly as possible, and sell the assets as soon as they can. Most intangible value is destroyed in this process, and there is unlikely to be any remaining goodwill. The receivers’ fee is paid from the funds collected during shut down, and they are required to act expeditiously through the receivership process.
As long as you and the other directors have acted within the law, there is no additional comeback on you as a shareholder, with the exception of any guarantees and collateral you have provided. Technically, your liability is limited to the capital you have invested in your firm – this is in fact where the notion of a ‘limited liability company’ comes from. If the structure of your business is a partnership or you are a sole trader, you have no such protection, and all of your personal assets could be at risk. Similarly, any personal guarantees you have provided to creditors or banks will also still be payable.
It goes without saying that you should get advice from your accountant and lawyer before initiating either of these approaches to closing your business.
Franchising and Licensing
If you have a novel business model with good market traction, franchising or licensing could be worth considering. While this may not appear to be a path to exiting your business’, it definitely is, and is one you should consider if it is viable. You stop being on tools, and focus on letting others operate under your brand and business model while you collect royalties.
If you think this is a viable option, start by talking to a lawyer with experience in franchises. One caution, however, is that this is not a simple path, and the odds of success are quite low. You need to be offering something truly compelling for people to buy into your franchise system. Just because you think it is a great idea doesn’t mean anyone else will!
Merge with Another Business
Another approach to exit that is frequently overlooked: grow your business though merger and acquisition. Get the business large enough to appeal to Private Equity funds, competitors, or even an IPO (see below). These approaches can be appealing to a business owner willing to invest 5 and 10 years more in their firm, and seek a growth path faster than organic growth.
There are risks in this approach as well. If you overpay for a business, or cannot integrate the portfolio into a single, streamlined operation, you might not see the return you expected.
Another way to use a merger is similar to the buy-in model discussed above. Link up with another, similar business, and finance the sale of your business into a merged entity. You can remain a shareholder (or simply a debt holder), and remain in the business for a period after the merger, easing out of your full-time commitment over a number of years.
Pivot
Where your business is not saleable or as valuable as you hoped, consider aggressively pivoting the business in a new direction. A pivot involves shifting your business’s core focus, products, or services to cater to a different market, address new needs, or explore fresh opportunities. This can be a smart option to leverage your existing experience and customer base into something more valuable. It should be obvious that this isn’t just a strategy available to you when planning your exit, and it can be a viable approach at any time during the life of a company.
When I have proposed this approach to clients considering their exit plan, they are often overwhelmed by the challenge. Where I have seen it applied, however, it breathes new life into the owner. They renew their entrepreneurial drive.
Pivoting is really only an option for small businesses. You can be more agile than larger firms and change course quickly to open new markets cost-effectively. You can start by identifying what isn’t currently working in your business or market and then making the necessary adjustments. Your focus is on identifying new opportunities that allow you to leverage your existing assets and expertise. While your initial business model might not have gained the traction you anticipated, the skills, knowledge, and resources you’ve accumulated are typically valuable assets that can be repurposed in a new direction. This not only minimizes the risks associated with starting from scratch but also enhances your chances of success in your pivot.
A well-developed Pivot Plan enables you to take relatively conservative changes if you prefer. The space you will into will be based on changes in a part of your market, such as new, breakthrough technologies, a significant change in consumer preferences, or access to a valuable resource that you can now use as your new business focus. An investment of a couple of years can alter the economics of your business, increasing your exit value.
A successful pivot is to a market opportunity adjacent to your current business. You want to redeploy as many of your firm’s assets as possible – brand, employees, systems, footprint, and expertise. If your target market is distinctly different, you should instead consider bootstrapping the new business from your current one, and then shut down your current business once the start-up is complete.
ESOP – An Employee Shareholder Owned Firm
This can be thought of as selling the business to your employees, with you and a bank financing the deal. True ESOPs are rare in New Zealand (although employee-owned firms are not). A US business owner selling their business into an ESOP structure can enjoy some valuable tax benefits. These benefits do not apply in New Zealand as we do not have a capital gains tax.
Going Public: IPOs and Stock Markets
I include this here for completion, but with no real discussion. An IPO (Initial Public Offering) is when you take your business public by selling shares to the public on a stock exchange. For this to be effective, you need to be consistently and highly profitable. The costs to list are quite high, and the ongoing compliance costs eat away at the firm’s profitability. If your EBITDA is well north of NZ$5M, you may be able to make this happen. Talk to a Tier-1 or Tier-2 accounting firm as your starting point.
Philanthropic Donation
Finally, you could simply give your business away as a charitable contribution. This is apparently more common in the US where there can be significant tax benefits. Most local charities would rather you sell your business and then donate the cash.
Conclusion
We have covered many different options, and there are probably other realistic approaches I haven’t seen. When you are developing your exit plan, you need to seriously consider all of your options and narrow down these options to those that will work best for you. Every business owner has unique requirements they will choose to include. Some of the exit methods I have covered here require additional risk (at least in the short term), additional investment, and additional time. Investing more of anything may be undesirable to you.
Discuss your preferred options with your exit advisory team to make an informed choice. Talk the options through, and understand what aligns to your plans and goals. Use your reason for exit to focus you on what is important. But this is where taking action has to take priority. Build your exit plan, build your action plan, and then execute.