Meet the Hart siblings, John and Jane, owners of Ted’s Gadget Factory. Their family-owned and operated business has been passed down from generation to generation, and John and Jane have been honored to extend the family legacy.

Ted’s Gadget Factory was established in the 1930s by their grandfather, Theodore, a skilled craftsman and prolific inventor. He created new and innovative gadgets quite often, and as the demand for his gadgets grew, he opened a manufacturing facility and started cranking them out in multiples. The business boomed, and it has provided a comfortable living for three generations.

Today, Ted’s Gadget Factory is a well-established company with a reputation for quality products and responsive customer service. John and Jane have worked for nearly 40 years to keep the family legacy alive, and the business is thriving. But now, in their mid-60s, they are ready to explore their exit and transition options. Unlike their father and grandfather before them, the Hart siblings do not have children of their own and must explore new options for transitioning the family business.

So, what options do the Hart siblings have? There are numerous, but here are four they might consider:

Sell the business to an outside party.

One option for the Hart siblings is to sell to an outside party: another company, a private equity firm, a family office, or an individual looking to buy an established business for their own family. One advantage of this option is that it provides an opportunity to maximize the cash they will receive at closing. However, finding a buyer who shares the Hart’s values and commitment to quality could be challenging. They should explore the market for all potentially interested parties to ensure the best chance of locating the best-suited buyer.

The Harts would be well advised to hire an investment banker or business broker to conduct the sale process professionally. When marketing a business to outside parties, owners need to keep their focus on the business to prevent any hiccups. Their limited time is best spent running their company while professionals create the marketing materials, perform the market outreach, vet potential buyers, schedule management presentations, coordinate due diligence, and help negotiate a successful closing.

Sell the business to key employees.

The Hart siblings might also consider selling the business to a key employee or group of key employees. This exit option keeps the business with people they know and trust, and it also provides for a potentially more comfortable transition for the Harts. It can also help ensure that the legacy of Ted’s Gadget Factory continues for many years to come. However, it is important to consider the financial and legal implications of selling or transferring ownership to employees; and it is necessary to make sure these key employees can run the business effectively. John and Jane won’t want to have to return and rescue the business once they’ve embraced their post-business lives.

Liquidate the business.

Often seen as an option of last resort, the Hart siblings could liquidate the business and share the proceeds. This option provides a simple and straightforward exit for owners, but it also means that the legacy of Ted’s Gadget Factory will come to an end. John and Jane will want to consider the impact of liquidation on their employees, other stakeholders, and their communities. Often a business owner who sells remains in their community and wants to exit their business in a way that allows them to hold their head high around town.

Create an Employee Stock Ownership Plan (ESOP).

An ESOP, in simplest terms, is a retirement plan. But more than that, according to The ESOP Association. “ESOPs motivate employees, increase productivity, improve worker retention, keep jobs local, contribute to business longevity, and so much more.” Using an ESOP to sell the business to employees over time gives them a stake in the future success of the company. It can also provide significant tax benefits for both the company and the owners, making it an attractive option for owners looking to exit their businesses in a controlled, structured manner. John and Jane would want to speak with an ESOP expert to help them determine if this is a viable option for them.

The Hart siblings have many options for exiting their business. The right choice will result from a variety of considerations, including their personal goals, financial situation, and the future of the business. As a CPA, Financial Advisor, and Certified Exit Planning Advisor, I would recommend that the Hart siblings work with a team of professionals to consider their options and ensure their exits and transitions are structured in a manner that provides them with the best opportunity to meet their financial, lifestyle and other post-business life goals. They’ll want to remember this once-in-a-lifetime event as a great success.

Who’s looking to buy your privately owned business? The universe of potential buyers typically includes your current management team, your family members, a strategic buyer who may be horizontally or vertically integrated with the same or a similar industry, Family Offices, and the focus of this article, a private equity firm.

What are private equity firms?

Private equity firms are investment firms that specialize in buying privately held businesses. They typically raise capital from institutional investors such as pension funds, endowments, insurance companies, and high-net-worth individuals and families. The capital they raise is used to acquire businesses they believe have the potential to grow and generate profits.

Private equity firms may have multiple funds for which they have raised money, with each fund having its own objectives, a specific investment strategy that guides its acquisition decisions. Some private equity firms may focus on a particular industry or geographic region, while others may be more agnostic about the businesses they look to acquire. Private equity firms might also consider the stage of development of a business, some focusing on early-stage companies with potential for significant growth while others target mature businesses looking for a capital infusion to fuel their next phase of growth.

Private equity firms have teams of investment professionals responsible for identifying and evaluating potential acquisition targets. Their methods for finding businesses include contacting business brokers, reviewing industry trade publications, and networking with industry experts. They often have individuals who simply make phone calls to business owners in the hopes of finding some willing to discuss selling their businesses. Most privately owned business owners report having received at least one unsolicited call from a private equity firm.

The firms can provide a variety of benefits to the businesses they acquire, including access to additional capital, operational expertise, and industry connections. However, they also operate under a different set of incentives and expectations than traditional business owners. Business owners need to understand these differences before entering a private equity transaction, because typically they will be required to put 10 to 30 percent of the sale proceeds back into their business that will now be majority owned by the private equity firm.

Benefits and considerations for business owners

A primary benefit of selling to a private equity firm is access to capital. The firms often have substantial financial resources at their disposal to invest in the growth and expansion of the businesses they acquire, which can be particularly useful for businesses seeking to fund new projects or expand into new markets.

Private equity firms can also bring operational expertise to the businesses they acquire. Many of the firms field teams of professionals with experience in such areas as finance, marketing, and operations who can work with the management of the acquired business to identify and implement best practices, which in turn can improve the efficiency and profitability of the business.

They may also have a network of industry connections that could benefit the businesses they acquire. For example, they may be able to introduce a business to potential partners, customers, or suppliers, or help a business tap into new markets.

Before selling to a private equity firm, a business owner should understand the holding period or exit requirements of the specific private equity fund. Unlike most other buyers from outside the company, private equity funds are required to resell at some point the businesses they buy in order to return profits to their investors and their firm. That can be a positive or a negative in the eyes of a selling owner who will still owns 10 to 30 percent of the business.

A private equity firms typically has a specific investment holding period, during which they work to improve their acquisition’s operations and profitability. Once they reach their investment horizon, the firm will typically seek to sell the business for a profit. The holding period will depend on the mandate of the specific fund and what time in the lifecycle of the fund a specific business is acquired. You can expect your business to be resold within a three-to-seven year window, and possibly to another private equity firm that will attempt to grow and sell the business within their specified timeframe. That might not sit well with a business owner who wishes to see their family’s legacy and relationship with their community live on.

While private equity firms can deliver a variety of benefits to businesses they acquire, business owners need to understand the expectations and incentives of private equity firms. Private equity firms are ultimately focused on generating returns for their investors, and they will expect the businesses they acquire to grow and generate profits in a relatively short period of time. That could involve changes to the business, such as streamlining operations, cutting costs, or expanding into new markets. Business owners considering a sale to a private equity firm should be prepared for these changes and be willing to work with the firm to achieve agreed-upon goals.