By Maurie Cashman
Transferring your company to insiders is attractive to business owners for many different reasons. Some believe that their companies arenâ€™t attractive to outside third parties. Others want to “reward” longtime employees with business ownership or want to give Key Employees the same shot at financial security they had. Still others have already made vague promises of ownership or believe the only way to continue their legacy is to transfer to key employees. Another group believes that a gradual sale to Key Employees will motivate those employees to increase the value of the company. Whatever the reason, before you choose this transition path, you might consider the subjects from your employeeâ€™s perspective(s).
â€œThe more a leader can see the world through their employees’ eyes, the greater the opportunity for honest two-way communications.”
— Bill Howatt, president of Howatt HR Consulting
Before we move ahead, letâ€™s define what an â€œinsiderâ€ is. An insider may be a co-owner(s), a key employee, or group of key employees, often called a KEG or Key Employee Group. These are people that have key knowledge of the business and/or have been with the business for many years, often with very deep experience and relationships. Many owners make the mistake of classifying people as â€œKeyâ€ who are not, often leading to disastrous results.
Learn About the Transfer to Insiders
It is not easy to transfer business ownership to key employees, children or other quasi-paupers without taking a great deal of risk. These transfers can succeed with: 1) proper planning, 2) a well-managed company, and 3) time. Proper planning begins with knowing what to do. You can read many books, attend workshops and seminars on the topic, and meet with your advisorsâ€”obviously we would like to be considered a part of that team!
Test Your Assumptions
Do the key employees that you assume will want ownership really want to be owners? Many motivated, loyal employees want to remain employees. They donâ€™t want to take on the stress, sleepless nights, and specter of financial disaster that you carry. To succeed you, key employees must possess the same spark that motivated you each day to make something of your businessâ€”no matter the risk or personal cost.
In addition to passion, do your key employees have the ability to run the business without you? Even great management and key employees do not equate to good, even passable, successor ownership.
Donâ€™t be surprised if one or more of your Key Employees declines to buy stockâ€”even under the most favorable terms. It is difficult, if not impossible to know what motivates your key employee group until you present it with a concrete proposal.
Stop Making Promises
If you have made any promises of ownership to one or more of your employees, you will have to handle those promises as you design your transfer of ownership.
Consider Age of KEG Members
Keep in mind that if a member of your KEG is older than 50, he or she may not want to spend years acquiring stock only to turn around and sell it. They may have to be paid in the form of a long-term installment note and may receive not much more than the purchase price. And they may be trying to diversify rather than concentrate their investments in ownership in your company. That employee may prefer to receive ownership-type benefits via a Phantom Stock or SAR plan. Do you know when each of your would-be successor owners plans to retire?
Next week, weâ€™ll complete this discussion of topics you need to think about before you decide to make the transfer to insiders. If you have any questions, or want more information, please give us a call or email. We can help.