Do you know to whom you are going to sell your business to and why? If you don’t, take a step back and to see how each potential buyer could impact your legacy, how you get paid, and what remains of your company after you are (hopefully) sipping coconuts on the beach. These are the five buyers you will most likely encounter. 

1. Strategic buyer

A strategic buyer is a company that is not overly concerned with your financials. (Don’t take this the wrong way—good financials and clean data do make an impact!) However, the synergies your company has through its products, services, employees, or some other factor give the potential buyer a better competitive edge. For example, they are seeking better pricing, reduction of competition, additional products or services, or advantageous relationships. There is a good chance that the strategic buyer has a greater sense of desire and urgency to acquire your company than would a traditional financial buyer.
Pro: You have the advantage and they want it. This can result in a higher offer and puts you in the driver’s seat.

Con: There’s a high  chance that it’s a competitor and there is a risk in disclosing your intellectual property or client list which makes the deal difficult to negotiate or walk away from if things go south.

2. Financial buyer

The most common financial buyers are private equity groups, investment banks, or other professional investors. This entity is buying your company as an investment, not a hobby. They look at the past, present, and future cash flow by diving deep into the financial data you provide.  Just like Warren Buffet tears apart a public company’s prospectus before he invests, the financial buyers have to find the same data with the information you provide. The offers are usually very specific in the dollar and terms they give because it is derived from predetermined financial models and criteria, which are heavily weighted on multiples of EBITDA.

Pro: These guys are in the business of buying businesses—and they aren’t alone—meaning that you could get multiple offers if so desired. You’ll also get your money quickly and know exactly what the offer is based on.

Con: While there’s no guarantee, you can safely bet that they’ll sell your business again in 3-7 years and it will be barely recognizable. The culture and people often become victims to the bottom line.

3. Succession plan

Succession planning is what many people think about when selling their business when in fact it is only one form of an exit plan. Succession is when someone, or a few people, take over your company’s executive decision-making and financial responsibilities. There are many ways for them to buy out your ownership such as an SBA loan from a bank, private funds, profit from the company’s cash flow, and others. The decision on who to transfer the business to is based on the buyer’s leadership, ability to sustain the current profit levels, and potential to grow the company.

Pro: You’ll have plenty of control and input about the future of your company based on this decision. There is the most opportunity to preserve your culture and vision in this scenario.

Con: This is typically a slower process and the payment is most likely to come in installments. There is the financial risk, as you’re typically betting on the continued success of the company—which can make it tough to make a clean break.

4. Employee Stock Ownership Plan (ESOP)

An ESOP is a special type of exit plan. The company is valued and shares are sold to the staff and management. This is a way for the owner to have some liquidity without having to sell the company to a third party. The owner typically keeps a majority of the share along with decision-making control. This allows the company to work together with a common goal toward overall company growth and profit, no longer working for “the man” but now the “community.” Over time, the owner’s shares can be sold to the employees and key management group to complete the transition.

Pros: The owner can stay a majority owner with decision-making power while planning a strategic exit and creating a unified community for the employees.

Cons: Liquidity will need to be provided to employees as they retire or quit and there is usually a slower transition if an exit is desired quickly. Additionally, the sale of the company in the future becomes a lot messier with an increase in owners.

5. Holding Company

A holding company (also known as a shell company) primarily exists to own other companies. It usually doesn’t have much staff and it doesn’t sell any products or services. The purpose is to collect dividends from the company’s earnings and increase the value of the shares it owns. The most common example is Warren Buffett’s, Berkshire Hathaway. Holding companies typically buy a majority ownership position. There are a couple different approaches depending on the holding company’s owner’s motivation.The first one is a more active role by using their economies of scale to increase margins across multiple companies and industries. The second approach is to buy and hold the company, keeping it independent while keeping a close eye on the financial targets they set. In this case, the pros and cons differ depending on the type of holding company and the involvement they have in your business as it relates to your wishes.

Pros: There are future growth opportunities with larger pocketbooks and economies of scale in addition to expert leadership and guidance

Cons: If you stay on board, you will have to be prepared to lose control and pivot focus to hitting strategic financial targets in addition to suddenly having a boss.