Small Business Financing July 27, 2010, 2:00PM EST

Alternative Exits for Business Owners

You won't soon sell your business for an ideal asking price. Here are three strategies to help you get a better offer than you might expect

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If you're looking to sell your company, it's time to get creative. While the small business mergers and acquisitions market is finally inching forward and deals are getting done, they better reflect seller motivation than attractive valuations. Bank involvement in acquisition financing deals also remains low. As long as buyers are forced to pony up bigger equity checks, sellers frustrated by anemic valuations are unlikely to see pricing snap back. Offers remain far from desirable.

Still, if you're looking longingly at an exit, fear not. Unconventional deal structuring can maximize a company's long-term value and do wonders to bridge the gap between a buyer's limitations and a seller's expectations. If there's just no way to get there via a traditional sale, there are alternative exit strategies that may yield better results.

1. Strike a deal with a third-party buyer.

Sellers who can look past a low valuation and embrace strategies that offer added, deferred payments can bump up a deal's overall payout over time. "Business owners that are flexible with terms and open to seller financing can still create a feeding frenzy among buyers," says Domenic Rinaldi, president and managing partner of Sunbelt Chicago, a leading business broker. He's seeing more creative deals than he did a few years ago and notes that sellers willing to assume greater risk regarding terms are netting premiums.

There are a variety of ways to sweeten a sale down the road. A low up-front price can be offset by a long-term consulting contract that pays the seller an outsized salary for minimal post-sale involvement. Sellers that own the real estate related to their business can also make up for a low purchase price by excluding the real estate from the deal and negotiating a long-term lease with the new buyer at favorable rates. Negotiated earnouts—bonus payments based on company performance—can also give a bounce down the road.

Deferred payments can also lower overall tax liability by spreading payments over an extended period, potentially during a period of years where your income will be in a lower bracket. If you are able to direct the downstream income to a separate business entity (for example, a consulting company or a real estate business), you may be able to write off certain expenses as well. A tax professional can help you think through related considerations.

Another way to bump up your company's value is to introduce healthy competition to the sale process. Start by making sure that your business is priced right. A realistic valuation is critical to generating interest. Today sellers can expect no more than two-times to three-times earnings for their business, excluding the value of hard assets such as real estate. If you can get enough potential buyers involved, the leverage swings back in your direction and you can negotiate the best terms.

Seller involvement in deal financing is also a prerequisite. A business owner unwilling to provide seller financing is generally not serious about making a sale. It is not unusual for purchasers to expect 30 percent to 50 percent participation from a seller. (For more about seller financing, see "Sellers Increasingly Play Banker.")

2. Sell to your employees.

If you can't make the numbers work with an external buyer, selling to your employees through an employee stock option plan, or ESOP, can be a good Plan B.

Here's how it works: A business directs up to 25 percent of its annual payroll before taxes into an ESOP trust. This pretax money can be used to buy a variety of investments, including shares of the founder's company stock.