If you have decided that selling to an employee best meets your transition goals and objectives, now you may be wondering how you go about this process and what you need to consider. As we have discussed in previous blogs and covered in our book, Cashing Out of Your Business: Your Last Great Deal, this is a critical decision, and many things need to be considered objectively. Selling or transferring the business to the wrong employee or for the wrong reason can lead to a costly mistake. Be aware of the following pitfalls:
- Do not assume your key employee wants to take on the risk of owning and running the business. Begin to discuss this well before your desired transition date.
- Do not believe ownership is the only means of financial reward for a key or long-time employee. In fact, deferred compensation or even phantom stock may provide the desired financial reward while not including outright ownership.
- Do not fail to objectively assess the employee:
- Do not assume they have the skills and ability to run the company. Even an employee that has been an asset in his or her current role may not have the qualities to excel in a new position as owner.
- Do not assume that longevity with the company makes the person a suitable successor.
- Do not fail to consider proper training. Has the employee been mentored and adequately groomed to take on this new role and responsibility? Has there been a succession plan and strategy implemented to provide for the gradual shift of roles and responsibilities from the owner to the successor?
- Do not assume other employees will embrace the new owner’s role. Have they demonstrated team building, delegation of authority, and duties?
- Do not assume they have leadership ability.
- Do not overestimate their willingness to accept responsibility and be held accountable for their decisions.
- Do not fail to question whether they possess critical thinking and problem-solving characteristics.
- Do not assume they understand and share your vision is for the company’s future.
- Do not fail to objectively ascertain if they possess and exemplify the culture and integrity of the company.
- Do not assume this can happen overnight. Internal sales and ownership transitions require years of planning to achieve a successful outcome.
- Do not underestimate the need for outside advisors in developing transition and succession plans and assistance in executing those plans.
As you can see, there is a lot to consider when selling to an employee. Owners sometimes choose an employee to take over the company because the person has been a phenomenal sale manager or has been with the company through good and bad times and wish to reward them. Selling the business is a major decision and will have a direct impact on your financial future. Most often, internal sales are funded through an earn-out, seller finance, or some other method dependent on the company continuing to produce profits that will pay you over time. Choosing the wrong successor can limit the company’s future and its ability to pay you.
As we discussed in our recent whitepaper, 2013 Guide to Selling Your Business Internally: Ensure Your Legacy Continues, which you can download for free from here, there can be many advantages and challenges to selling internally. One of the main challenges is maintaining objectivity about the situation, including the potential successor’s capabilities and if they align with the needs of the company.
The truth is sometimes we are so close to a situation or an employee it can cloud our thinking. After all, we know and have an emotional tie to this person. We want to see whomever we choose succeed. This is most likely the largest financial decision of your life. It can be accomplished, but don’t underestimate the complexity, the time needed, and the outside assistance required for a successful outcome. Enlist the assistance of trained, qualified advisors with the tools, resources, and objectivity who can assist you with this process.