Why Business Owners Favor Third-Party Sales

By Fortress Business Advisory

For many owners, a sale to a third party is either their favorite or second favorite Exit Path. In fact, according to The BEI 2016 Business Owner Survey Report, 59% of business owners were interested in pursuing a sale to an unrelated third-party. While this number is staggering compared to the other Exit Paths business owners initially pursue, it makes sense when considering the obvious advantages of a third-party sale.

The advantages we’ll discuss exist in the context of the three fundamental goals of all BEI Exit Plan designs:

  1. Maximize the amount of money the owner receives.
  2. Keep the owner in control until he or she receives all monies.
  3. Minimize the owner’s risk.

Advantages of Third-Party Sales

In our prior discussions about the advantages of a sale to management and the challenges of a sale to management, we’ve examined six aspects affected by a business owner’s choice of Exit Path. Those same six aspects will guide today’s discussion, and help business owners and their advisors examine some of the general advantages inherent in a third-party sale.

Advantage 1: Financial Security

There are three reasons why a third-party sale is advantageous to business owners who want financial security from their exits.

  1. More Money.Third-party sales tend to have the highest ceiling for potential payment among all Exit Paths, especially if a strategic buyer is the purchaser.
  2. More Money, More Quickly.The fundamental advantage of a third-party sale is that business owners receive the bulk of the purchase price at closing, rather than over the course of several years.
  3. Relative Ease.A third-party sale’s deal structure is usually more straightforward than other transfer methods, provided business owners and advisors commit to proper pre-sale planning.

Advantage 2: The Time Factor

Compared to other Exit Paths, a sale to a third party can be completed relatively quickly, usually within a year.

Advantage 3: The Time Margin

Recall that the time margin is the period in which business owners develop interests outside the business while still receiving income from it. You might infer that the relative quickness of a third-party sale prevents owners from capitalizing on the time margin, but that’s not always the case. With proper pre-sale planning, business owners often find that their time margins increase.

Advantage 4: Tax Consequences

Typically, a business owner’s Advisor Team can structure a sale so that the proceeds from the sale-of-ownership interest are subject only to long-term capital gains taxes, which can save business owners substantial amounts in tax dollars.

Advantage 5: Values-Based Goals

There are two advantages to a third-party sale in terms of a business owner’s values-based goals.

  1. Avoids Business–Family Issues.Owners can treat all children equally by (eventually) providing them equal amounts of cash. This advantage appeals to owners who would rather not worry about which child will run the business and which children will receive other assets (or not) to compensate for not owning the business.
  2. Benefits Key Employees. Owners can choose to provide a cash benefit to selected employees to reward them for their contributions to the company. Key employees may enjoy more opportunity for advancement, salary, perks, and benefits working for the new (and larger) owner.

Advantage 6: Successor

With a properly planned third-party sale, it can be possible to limit the possible new owners to a select few who share the seller’s culture and values.