After 35 years of helping family business owners develop strategic succession plans for their businesses, I have discovered that there are three main groups of potential buyers. About 30% to 40% of business owners will sell to one or more family members, 15% to 20% will sell to qualified key managers (because family members are not interested), and 15% to 20% will sell to an outsider. The pricing and terms of the sale can be totally different for these three types of buyers.

If the business is sold to a family member (e.g., child, child in-law, sibling, niece or nephew), many owners will gift some stock because the buyer has usually worked for the business for several years and has already earned it. The owners may also sell a large block of stock using a promissory note that is paid over time. Often, the current owner will stay on as chairman of the board or as a special paid consultant for several more years to guide the new buyers and to keep his or her health insurance and some other benefits. The income paid to the sellers to be consultants or members of the board of directors will be taxed at ordinary income rates and deductible to the company. The payments for the stock that the family member is buying are not deductible but the interest on the promissory note would be deductible. It is important that the buyer and the seller work carefully with their tax and financial advisors to make sure there is enough cash flow to make all of these payments after taking into consideration taxes that must be paid first.

If the business is sold to a key manager, the owner has some confidence in knowing that the manager has already proven his or her ability to run the company. A sale of this type is usually done in two steps. The first 49% of the stock is sold in phase one, with installment payments over a few years. If everything is still going well with the company, then the remaining 51% would be sold in phase two. Once again, the owner may continue to help as a consultant. He or she may stay on the board of directors and also receive continued deferred compensation. The sales agreement with the key manager should be drafted carefully so that the owner has plenty of protection during the payment years.

If the business is sold to an outsider, the buyer undoubtedly has the ability to pay cash, and if he or she is in the same industry, the price could be higher. A strategic purchase by someone in the industry is always desirable if a family member is not going to continue to control the company. The sales price is almost always higher if the owner is willing to help the buyer for at least 12 to 18 months with a smooth transition. Having the owner help in the transition by working with the customers, vendors, and employees is always important to the buyer and this normally generates a higher total sales price.

The succession planning process usually takes two to three years or more. Take the time up front to adequately plan the succession process, clean up the company to make it look desirable, keep all of your employees well trained, and modernize every facet of your business to maximize the sale price.