Deciding what you will do with your firm, whether you decide to sell internally or externally, will be life-changing.
Firm owners have a lot on their plate these days. But perhaps the most crucial thing on the never-ending to-do list is ownership transition. As I have mentioned in past articles for The Zweig Letter, ownership transition will happen whether you are prepared for it or not. You cannot escape it. Deciding what you will do with your company, whether you founded it yourself or it was handed off to you 20 years ago, will be a life-changing event. So, let’s talk about the things that will push you to sell internally or externally.
You might consider an internal sale if:
- There is demand for your stock internally.
- You’re comfortable selling your stock at a 15 percent to 45 percent discount.
- There is an established valuation formula that is fair to both the seller and buyer.
- You have a detailed buy/sell agreement with specific provisions.
- The firm is generating enough pre-tax, pre-bonus profit to fund the internal transition.
- The firm is not currently overleveraged and carrying too much debt on the balance sheet.
- You have five to seven years of runway to ensure the transition goes smoothly, and you’re willing to course correct if needed.
- You’ve established a clear timeline of when you want to exit the firm.
- You have mentored the second tier to be leaders and future owners in your firm by giving them more responsibilities.
- There is a clear understanding of your role as you no longer have a controlling interest in the firm.
- Significance is placed on continuing the legacy of your firm.
You might consider an external sale if:
- You understand that selling your firm can be another full-time job.
- You want greater career opportunities for your employees and being a part of another firm can provide that.
- You and the buying firm have the right culture for each other.
- You want to maximize your return.
- Your firm has organized and detailed financial statements.
- There is a second tier in place so that the buying firm can know there is strong management in the firm after you exit.
- You know you will be required to stay in the new entity around three years to receive the rest of your payout.
- You would welcome no longer being the one making the decisions.
Both options lead to different paths and it is necessary that principals know what they are getting themselves into before they commit to either of these two options. Once you decide, do not lose the momentum and be consistent with pursuing ownership transition. Choose wisely!
Ezequiel Tovar is an analyst within Zweig Group’s ownership transition team. Contact him at etovar@zweiggroup.com.
