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A primer on deal structure and its implications on the sale of your business

By ,
Jeremy S. Piccini, Bertone Piccini LLP.
Jeremy S. Piccini, Bertone Piccini LLP.

Transacting the sale of your business can be an extremely profitable endeavor. The success of the sale, however, often hinges on the chosen form and exit strategy.

For example, business owners might consider selling to a strategic competitor, private equity company, or directly to the business’ employees. The benefits of pursuing one of these strategies over another vary depending on the goals of the business owner, but some of the most important factors of each include tax consequences, third party costs, and the degree of autonomy that the seller has over the future of their business. Here are a few examples of the ideal target purchasers for your sale.

  • Strategic Competitors­­­­­­­­­­­­­­­­­­­­­­­­.  Selling to a strategic competitor removes the cost and hassle of hiring brokers to help transact a more complex auction process. Business owners are likely familiar with their competitors and are therefore better situated to initiate an arms-length discussion if they are savvy in such an arena. Selling to a strategic competitor is also useful when the seller wishes to better direct the destiny of their business. More likely than not, a strategic competitor would seek to acquire your business because it contributes something to their current aspirations and, therefore, the competitor views the acquisition as more substantial than just a way to earn a short-term profit. The same sentiment does not exist in a sale to a financial buyer, such as a private equity, who may have ‘bottom line’ mandates as part of their fund, such as near-term sale of the business or eventual initial public offering. Finally, strategic competitors are usually willing to pay more than financial buyers because they are using your business a long-term investment into the growth of their own and because they understand the industry better than anyone.
  • Private Equity Buyers­­­­­­­­­­­­­­­­­­­­­­­­­. Selling to a Private Equity buyer (PE) is an alternative which allows a business owner to essentially sell almost their entire business while retaining some small management interest in the company for a number of years. PEs generally pay well for a business, and will work very quickly and efficiently to execute the sale. A seller will not, however, retain much real autonomy or control over the business, but typically must remain involved for a period of time. Sellers should also be aware that selling to a PE will likely involve a great deal of due diligence costs. PEs only invest in companies that meet their specific qualifications, so PEs will need to “appraise” your company - meaning increased CPA or counsel fees for the seller. Sellers should consider PEs if they can handle the costs and don’t mind losing control over the company and its mission. If company identity is more important to you than investment and secure profitability, then it would be beneficial to consider a sale to a strategic competitor or an ESOP.

ESOPs.  Under an employee purchase, sometimes structured formally as an “ESOP” (employee stock ownership plan), a departing owner sells their shares directly to their company’s employees. ESOPs are by far the most appealing option for business owners seeking to ensure that their company’s mission lives on after their departure. An ESOP ‘keeps it in the family’ by giving ownership interests directly to the company’s employees, rewarding them for their contributions to the company, while also providing a sound exit strategy to the owner. Unlike selling to a strategic competitor, which could result in consolidations and layoffs by the acquirer, an ESOP bolsters and encourages the current workforce. Tax benefits under an ESOP vary depending on the whether a corporation is a C Corp or an S Corp, so business owners should consider discussing the tax consequences of a ESOP with a professional tax adviser. Business owners should likewise bear in mind that ESOPs are subject to many federal regulations and fiduciary responsibilities.

By putting in the time to ascertain the specific implications of a given deal structure with the proper professionals, business owners will dramatically increase the profitability of their sale, reduce potentially substantial tax consequences, and ensure that their shareholders retain certain benefits. After all, the sale of your business should produce nothing less than the best possible outcome for you and your co-owners.

Jeremy S. Piccini is a partner at Bertone Piccini LLP and provides strategic counseling to clients in the areas of commercial transactions. Michael Cort, summer associate at the firm, assisted with this blog.

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