Challenges of selling your shares in private companies

The process of finding a buyer for a private company can be a daunting task, particularly when there are no obvious buyers or a defined market for the specific company in question. Unlike public companies with accessible valuations and liquidity through stock exchanges, private companies have unique characteristics that often make them challenging to sell. The absence of interested buyers complicates the process, demanding extensive planning, strategic marketing, and a deep understanding of the company’s industry and potential buyer landscape. This article explores the reasons behind these challenges, the inherent complexities of private company sales, and the strategies that can improve the chances of finding the right buyer.

Checkout this short video on the topic:

Why Selling a Private Company is Challenging

Private companies, by nature, lack the liquidity and visibility that publicly traded companies enjoy. A few core challenges make finding a buyer especially difficult:

1. Limited Market Visibility

Private companies are often small to medium-sized businesses that do not have the market visibility of their larger, public counterparts. The absence of regular public disclosures, financial reporting, and the lack of a stock exchange listing makes it hard for potential buyers to gauge the company’s value and growth potential.

2. Financial Transparency

Financial transparency is another significant issue. Public companies are required to report their financials regularly, making them more attractive and comprehensible to buyers. Private companies, however, do not have to disclose financial statements publicly, and potential buyers may find it challenging to assess the company’s health without an inside look. The process of providing this transparency can involve significant effort, including preparing audited financial statements, which some smaller private companies may not routinely maintain.

3. Valuation Complexity

Valuing a private company can be a complex and subjective process. Without a widely accepted stock price or even regular transaction prices, private companies rely on valuation techniques such as discounted cash flow (DCF) analysis, comparable company analysis, or precedent transactions. However, these valuations can vary widely, especially when a potential buyer does not have complete information on the company’s financial and operational metrics. This uncertainty makes it difficult to set an agreeable price, further complicating the search for buyers.

4. Buyer Qualification

In cases where a potential buyer is identified, the buyer’s ability to pay a reasonable price or their interest in the company’s growth and operations may become a problem. Private companies may require substantial additional investments in infrastructure, technology, or workforce, which some buyers may not be willing to undertake. Even if buyers have the resources, their alignment with the business’s vision and operations could pose challenges. Qualifying and identifying genuinely interested buyers who can meet the seller’s requirements can thus become a prolonged, tedious process.

5. Inaccessibility of a Broader Market

Public companies attract buyers globally through stock exchanges. However, a private company’s market is often limited to local, industry-specific, or niche sectors. For many private companies, their appeal is confined to a narrow group of potential acquirers with specific motivations, which limits the likelihood of finding a buyer without significant marketing and outreach efforts.

6. Owner Dependence

Private companies, especially smaller ones, are often deeply dependent on their owners, who may serve multiple roles in the company, from operational oversight to customer relationships. This dependence can deter potential buyers, who may fear the company’s performance will decline once the owner exits. Additionally, a potential buyer may seek assurances of continuity or demand the owner’s involvement during a transition period, which the seller might not be willing or able to provide.

Strategies to Increase the Likelihood of Finding a Buyer

Despite these challenges, several strategies can enhance the odds of finding a buyer for a private company, even when no interested party exists at the outset.

1. Create a Comprehensive Exit Strategy

A well-planned exit strategy is essential for making the company more attractive to buyers. The exit strategy should include a business valuation, a roadmap for improving the company’s financial performance, and a timeline that allows for a smooth transition. Sellers should begin preparing at least two to three years in advance to address operational inefficiencies, strengthen financial records, and make other adjustments that could increase the company’s market value.

2. Engage in Strategic Marketing and Outreach

Marketing a private company sale requires more than just a listing on business-for-sale platforms. Instead, it demands targeted outreach to individuals, companies, and investment firms that might find strategic value in the acquisition. Sellers can work with specialized brokers, investment bankers, or mergers and acquisitions (M&A) advisors who can facilitate connections and market the business directly to likely buyers. Identifying and engaging with industry players, including competitors, suppliers, or large players interested in vertical integration, can expand the pool of potential acquirers.

3. Develop a Clear, Transparent Financial Picture

Since financial transparency is a significant barrier, preparing detailed and audited financial statements that go back several years can help build buyer confidence. The company should ensure its financial statements are organized, well-presented, and comply with generally accepted accounting principles (GAAP). This provides potential buyers with the data needed to make informed decisions and mitigates some of the perceived risks associated with private company acquisitions.

4. Focus on Growth Opportunities and Future Projections

Buyers are often attracted to companies with strong growth potential. By highlighting future revenue opportunities, market expansions, new product lines, or underutilized assets, sellers can demonstrate that their company has upside potential. Developing realistic, data-supported growth projections can make the company more appealing and help to justify the valuation.

5. Address Owner Dependency Issues

To minimize concerns about owner dependence, private company owners should work to gradually delegate responsibilities to a management team. Having experienced managers or executives who can run the business independently shows potential buyers that the company is resilient and will continue to function well without the original owner. Additionally, agreeing to a temporary consulting role during the transition period may provide buyers with the reassurance they need to proceed with the purchase.

6. Consider Different Buyer Types

Expanding the potential buyer pool requires flexibility and an understanding of different buyer types:

• Strategic Buyers may acquire companies to improve their existing operations or expand into new markets. Identifying competitors, suppliers, or companies in related sectors can increase buyer possibilities.
• Financial Buyers, such as private equity firms, seek businesses with solid cash flows that can be optimized for profitability. Positioning the company as a steady cash flow generator or as having restructuring potential can make it attractive to this buyer type.
• Individual Investors or Entrepreneurs may be interested in running a small business. This buyer type often looks for businesses that offer a manageable level of risk and provide a steady income.

7. Implement a Competitive Bidding Process

If there are multiple potential buyers, implementing a competitive bidding process can encourage better offers. By setting a deadline and establishing a transparent process, sellers can create a sense of urgency, potentially raising the price and improving the terms of the deal.

Legal and Logistical Considerations

Once a buyer has been identified, several critical legal and logistical steps remain:

1. Due Diligence

The due diligence process involves the buyer verifying all aspects of the business, including financial statements, contracts, employee agreements, intellectual property, and customer data. A seller who is prepared for this process with well-organized documents and clear records will facilitate smoother negotiations and help instill buyer confidence.

2. Negotiation of Sale Terms

Negotiating sale terms is crucial, covering aspects such as the purchase price, payment structure, warranties, liabilities, and potential earn-outs. Earn-outs, where the seller receives additional payments based on the company’s future performance, can help bridge valuation gaps between buyer and seller expectations. The negotiation phase is where having an experienced M&A advisor or attorney can be invaluable, ensuring that the seller’s interests are protected and that the sale terms are beneficial.

3. Transition Planning

Successful transition planning ensures continuity and stability post-sale. This could involve training new management, transferring key relationships, or documenting essential processes. Transition plans can vary in duration, but having a clear roadmap can make the acquisition more attractive to buyers concerned about operational continuity.

4. Tax Considerations

The tax implications of selling a private company are often complex and can impact both the seller and buyer. Sellers should consult with tax professionals early in the process to optimize the sale’s tax structure, which could include installment sales, capital gains considerations, or tax deferral strategies.

The Role of M&A Advisors and Brokers

M&A advisors and brokers play a critical role in facilitating private company sales. They bring industry expertise, access to potential buyers, and experience in structuring complex transactions. The right advisor can add significant value by ensuring that the business is marketed effectively, that the seller’s interests are protected during negotiations, and that the transaction remains compliant with legal and regulatory requirements. In cases where there are no existing buyers, these professionals may be instrumental in conducting outreach and identifying potential buyers who otherwise would not have been considered.

Conclusion

Finding a buyer for a private company without existing buyers is undeniably challenging but far from impossible. It requires careful planning, financial transparency, and a strategic approach to identifying and engaging with potential acquirers. By addressing valuation complexities, owner dependency, and limited market reach, private company owners can make their businesses more attractive to a broader pool of buyers. Moreover, engaging professional advisors, preparing a comprehensive exit strategy, and maintaining flexibility in the negotiation process are critical steps to closing a successful sale.

In the end, selling a private company is a complex, multifaceted process that involves not only finding a buyer but also meeting the buyer’s expectations for growth potential, financial transparency, and operational resilience. By acknowledging and addressing these challenges, private company owners can improve their odds of securing a buyer and achieving a favorable outcome. This methodical, structured approach to the sale process can help pave the way to a successful exit, even in a difficult and uncertain market.

If you have shares in a private company you want to sell, see this page:

https://vccross.com/secondaries2/shareholders

• Category: Private Markets, Venture Capital Cross
• Tag: selling your shares