Right Ownership Transition Path?
By Maurie Cashman
One of the great advantages of having other owners in your business is that you can sell to other owners as your means for exiting the business. As discussed last week, it is important to select your successor early in the Ownership Transition Planning Process. A common Ownership Transition Planning technique is to have a younger individual buy into your business on a minority basis while you are still active. Upon your Ownership Transition, the younger owner will purchase your remaining stock.
This can be advantageous because the younger person learns the business â€” its operation, structure, management, employees and customers â€” while you are still involved in the business. More importantly, the younger personâ€™s capabilities (as well as his or her weaknesses) are known to you, and you can work with them to strengthen their abilities so you will know your business will be in capable hands after you leave. Most important, the business can be sold to a market you create and control.
Take time to compare the advantages and disadvantages of this scenario before picking your target successor.
- Properly planned, it is possible to be cashed out of the business when the controlling interest is sold;
- The deal can be structured in advance to suit the ownerâ€™s needs and objectives;
- Increases likelihood that all of the employees who helped build the business wonâ€™t lose their future with the company;
- Pre-qualifies the buyer(s) through on-the-job training and observation;
- May continue the culture and mission of the business;
- Maintains greater control during the buyout;
- A final benefit of planning an employee buyout is that the steps taken to build value and train future owners will make the business more profitable, more stable and better managed â€” even if the owner decides to postpone their retirement or to sell to an outside party. Grooming the successor(s) allows flexibility in case the unexpected happens to the successor(s), such as sudden disability or receiving a large family inheritance. At the same time, the owner has developed a stronger business, both from a financial and employee standpoint.
Properly structured, this form of business transition can be a powerful tool in building business value and can create a win-win situation for the owner and the successor, regardless of how the ownership is eventually transferred.
- Little or no cash up front;
- A greater risk may exist, unless proper planning and implementation has occurred, because the ownerâ€™s buyout money typically comes from the future earnings of the business after they leave it.
- It can be very difficult for the employees to be able to afford the purchase of the business. The owner may simply have too much money and financial goals at risk.
- Employees are not entrepreneurs and they may not respond well to the challenges and pressures of ownership. They may lack an ownerâ€™s mindset and appetite for risk.
Although there are many ways to minimize the disadvantages of this transfer strategy, it is important to keep in mind that there is significant risk in transferring control of the business to an insider, unless you are cashed out. It is important to undergo proper planning so that you can take advantage of the positive outcomes associated with your chosen Ownership Transition path.
Next week, we will look at a sale to a third party.