Parting ways

According to Joel J. Guth, an advisor in
Smith Barney’s Citigroup Family
Office, selling to an outside third party is actually easier than selling the business to
a family member or a group of key employees. “You can have open negotiations without feelings getting hurt,” Guth says. “There
is less emotion involved.”

Smart Business, as part of its continuing
series on exit strategies for business owners, talked to Guth about selling to a third
party.

When you refer to a third-party buyer, what
do you mean?

There are two kinds of third-party buyers.
One is a strategic buyer who makes the
purchase because it’s a strategic fit for
another existing business. The other is a
financial buyer, a pure investor who is buying the business because he thinks the cash
flow can grow and he can generate a return
on his investment.

What are the differences between a strategic
buyer and a financial buyer?

Many times the strategic buyer is looking
to cut costs and take advantage of synergies with existing businesses. This may
mean the new owners will close locations,
move offices and reduce jobs to eliminate
any overlaps. As the new owner, a strategic
buyer may ask the prior owner to leave
immediately after the sale closing.

The financial buyer is usually looking for
a business that can operate ‘as is.’ This usually means keeping the current facilities,
management team and the bulk of the
employees. Many times, a financial buyer
will want the prior owner to continue to
run the business and may offer lucrative
incentives to help continue the success of
the business.

Historically, one of the main differences
between the two buyers has been the price
each is willing to pay. Strategic buyers have
been known to pay a higher multiple than
financial buyers. However, as more and
more money has flowed into private equity
firms, the multiples private equity firms are
paying has increased.

What are the advantages to, or benefits of,
selling to a third party?

You can have open negotiations with a
third party without feelings getting hurt because you’re selling an asset in a truly
open market. Also, multiple bidders can
create a higher value and better terms for
the seller because of the competitive
process. Selling to a third party can be
extremely attractive for owners who want
their cash upfront and want to have very
little of their financial future tied to the
future success of the business.

The main reason people sell to third parties is they realize a third party is willing to
pay a significant amount more than
employees or family can pay. Many times,
in order to give the owner what he needs to
accomplish his objectives, the only solution is to sell it to a third party.

What are the drawbacks to selling to a third
party?

The immediate concern can be the culture, mission or vision of the company that
the owner has spent 25 years cultivating.
You give up most control when you sell to a
third party.

As mentioned before, the employees are
always a concern because a third-party
owner may come in and wipe out a portion
of your work force.

It comes back to the seller’s goals and
objectives. If he is ready to walk away, then
a strategic buyer may be a better fit. If he is
not ready to walk away, he may need to
pursue financial buyers.

Has the number of businesses being sold
increased in recent years?

Movement has increased dramatically. A
successful business owner may get three
or four phone calls a week. It is all a function of the good economy, generous lending standards, demographics and the huge
increase of capital in private equity funds.
In other words, credit is readily available,
baby boomers that started companies are
now getting ready to do something else,
and there are billions of dollars waiting on
the sidelines to buy good businesses.

The rise of private equity capital has
increased the flexibility an owner has
when selling his business. A private equity
firm is willing to buy 100 percent of the
business or allow the owner to retain a portion of the equity in the business. For owners who think they are three to five years
away from permanent retirement, a private
equity group may offer a way to take some
money off the table today, and owners can
still run the business for a few more years.

Finally, with the dollar weakening, we’re
starting to see an increasing number of foreign investors coming into the marketplace.
U.S. businesses have become cheaper for
these foreign investors.

Citigroup Family Office is a business of
Citigroup Inc., and it provides clients
with access to a broad array of bank and
non-bank products and services through
various subsidiaries of Citigroup, Inc.

Citigroup Family Office is not registered
as a broker-dealer nor as an investment
advisor. Brokerage services and/or investment advice are available to Citigroup
Family Office clients through Citigroup
Global Markets Inc., member SIPC. All references to Citi Family Office Financials
Professionals refer to employees of
Citibank. N.A. or Citigroup Global Markets
Inc. Some of these employees are registered
representatives of Smith Barney, a division of Citigroup Global Markets Inc., that
have qualified to service Citi Family Office
clients.

Citigroup Global Markets Inc. Citicorp
Investment Services. and Citibank are
affiliated companies under the common
control of Citigroup Inc.

JOEL J. GUTH is an advisor in Smith Barney’s Citigroup Family
Office. Reach him at [email protected] or (614) 460-2633.