By Maurie Cashman
Is employee ownership appropriate for every employee? Consider this example. Tom Pace was dedicated to his business and to each of its 48 employees. As he began thinking of the day when he would leave his wholesale landscaping supply business his thoughts turned to selling the company to the three key employees who had done so much to build the business and who ran it on a daily basis.
There was no question that they were capable of running the business. Tom went to California for eight weeks each winter and the business didn’t miss a beat. So Tom approached these employees to see if they would be interested in buying the business on favorable terms. They responded enthusiastically and Tom was off to his lawyer’s office to draw up a transfer agreement.
That’s when the landscape changed.
“It’s funny how scarcity of capital can focus one’s mind.â€
Venture capitalist Mark Suster
Tom’s lawyer suggested a number of different transfer strategies, each of which required that the key employees assume personal responsibility for a portion of the purchase price. The business would be the source of the payments for the purchase of Tom’s ownership. But the individual buyers would be responsible for any shortfall.
When the key employees became aware that they would be obligated for the unpaid purchase price, their desire to own the business crumbled. The historic and projected cash flow from the business demonstrated that the business would be able to support the buyout payments and the key employees were confident that the business would prosper under their ownership. But they declined Tom’s offer. These employees were comfortable with being key employees; they were uncomfortable assuming the the associated risks-of business ownership.
Your business may be similarly blessed with capable, energetic management. Your key employees may be able to run the business as well as you can. But they may not possess the entrepreneurial temperament that accepts risk.
Good, even great management and key employees may not equal good successor ownership. To succeed you, key employees must possess the same spark that motivated you each day to make something of your business-no matter the risk or personal cost.
It is difficult to know what fires burn within your key employee group until you present it with a concrete proposal. This proposal must describe not only the opportunities of ownership, but also the risks. Make this proposal before you travel far down the path of drawing up transfer documents.
Realize that you must keep these key employees motivated to stay with the company after you’ve left it. You want them to continue their efforts to increase the value of your company. One way to accomplish both may be to install a cash-based incentive plan with vesting provisions that commit them to the long-term success of the business.
Make employees financially interested in the future of the company – even if they choose not to own it.