So you’ve decided the best transfer option to meet your goals and objectives is an internal sale. As we have discussed in previous blog posts, selling your business internally has many advantages over external options, but who can you sell to?
Likely candidates include:
- Key Managers
- Family Members
- Business Partners
Let’s consider the pros and cons of each option.
Selling to Employees
Owners would often like to reward all of their employees but feel there is no viable way to accomplish this. One often misunderstood transfer option is the Employee Stock Ownership Plan, or ESOP. Contrary to the name, this does not mean selling stock directly to each employee. This method involves selling all or some of the owner’s shares to a trust for the benefit of all employees, while the owner maintains operational control. It also provides the owner liquidity, a built-in buyer, and some great tax advantages. We discuss this and the other internal-transfer options in more depth in our book, Cashing Out of Your Business, Your Last Great Deal.
Selling to a Key Manager
As the name implies, you may have an employee who has been your right-hand person for a period of time, and you feel s/he would be best suited to take over the reins. Many times, however, a key manager may not yet have the necessary skills or abilities to handle your role. There may be additional training, mentoring, and/or additional team development needed to assist the person in growing into the new role. It will also be important to pick a successor who can garner the respect of the employees to avoid any business disruption during the transition.
Selling to Family Members
This may be the preferred choice in many cases, but it also requires the utmost objectivity and care. Too many times it is assumed that family members will be the successors just because they’re family. In addition, family members can feel a great deal of pressure to step into this role and may be hesitant to voice their reservations or concerns. As with any internal sale, identifying a successor’s strengths, weaknesses, and abilities is key, not only for the individual’s future but also for the continued success of the company. The blending of family and business is never easy, but when an ownership transfer is considered, it can become even more important to involve impartial, professional assistance.
Selling to a Business Partner
Never assume your partner(s) wants to buy you out. They may actually be planning to move on when you do. This can be true regardless of age or age differences. When there are partners in a business, it is critical to conduct comprehensive transition planning for all parties. Since the business is most likely the largest asset for all partners, devising a plan that will achieve multiple owners’ goals and enable the business to continue to thrive will take planning, communication, and time.
One of the major challenges in the internal-sale option may be setting aside your emotional ties to the individual or individuals you are considering selling to. This can cloud objectivity, reasoning, and sound decision making. No matter which successor you choose, seek objective support and advice in accomplishing an internal sale.
As with any transition, there is no substitute for time. Planning 3 to 5 years in advance will give you time to positively impact the outcome.