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Selling Your Company: Six Common Pitfalls

By: George Spilka
Posted: May 1, 2008, from the May 2008 issue of GCI Magazine.

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Definitely not. Most owners don’t understand many of the benefits that can arise from a sale. Usually owners of closely held corporations have a vast majority of their personal wealth concentrated in the business. In and of itself, this is poor financial planning, but it is a typical by-product of owning a closely held corporation. By selling all or part of the company, owners can reduce their concentration of wealth in the business. In addition, it puts their estate in more liquid condition.

Younger owners, too, must evaluate their financial condition and whether they want to enjoy the finer points of life while still in prime health. After their covenant-not-to-compete expires, which could occur after a five-year period, they can get back in business if they so choose. However, they will commit only a small portion of their sale proceeds to the new business endeavor. This will assure that they have lifetime financial security. They will likely be refreshed and might even be eager to pursue a new business endeavor. From a personal standpoint, this is a very attractive alternative for a number of owners.

Where owners merely want to reduce their concentration of wealth in the business but still want to run the company, a recapitalization with a private equity firm might be the answer. In this type of situation, a selling owner can get approximately 90% of the deal value while still retaining a 30% interest in the recapitalized company. As most private equity firms strongly prefer management to stay, the selling owner should be able to continue to run the business in, basically, an unfettered manner. The only thing likely to change is that the owner will now report to a board of directors. The owner will still determine the company’s strategic course.

For a business owner who wants to pursue this alternative, it is essential that they find the right private equity firm. Only a few private equity firms are price-aggressive and pay a price comparable to a strategic acquirer. As a seller, verify whether these firms have companies in their portfolio that are a strategic fit with the business. This should enable the private equity to pay a price comparable to a strategic acquirer. An experienced advisory firm will know if a recapitalization makes sense for the owner and which private equity firms historically pay a strong price.

A seller has to accept notes as part of the transaction proceeds.