Selling your business internally can be extremely rewarding. Imagine getting to see your chosen successor move into his or her new role with enthusiasm and energy for the future; it can evoke a feeling of great pride. But the successful succession from one business owner to the next is not something that just automatically happens. As we have discussed in our blogs and whitepaper, How Do I Sell My Business to an Insider?, choosing the right successor, grooming him or her, successfully handing over the reins, and getting what you deserve for your business is not a simple task. It requires time, planning, and objectivity to get it all right.
- Financing the Sale
Usually an internal sale is accomplished via seller-financing or a sale of the owner’s shares over time.
- The successor generally does not have access to adequate capital to make an outright purchase making other funding options necessary.
- The continued profits of the company are required to retire the debt and make payments to the exiting owner for their shares.
- Obtaining third-party financing, is not always possible and is not as flexible as seller financing. Some lenders will be hesitant to loan capital to the company when the existing owner is leaving the business.
Using creative internal funding methods, such as deferred compensation plans, may provide the time management needs to fund the buyout entirely with business profits.
- Choosing the Right Successor
This is probably the most important consideration for any internal transition. The company’s future viability and therefore your future payments are dependent on the company’s continued success.
- In order to select the most appropriate successor, you must be objective in assessing the candidate’s abilities, attitude, aptitude, and willingness to take on the new role.
- The successor will need sufficient time and training to achieve success in the new role. The role of owner will usually require different skills and abilities than the person has been using in his or her current role. Do not make the assumption that since the individual has been with the company for a long time he or she can just move into this role without proper assistance.
- Choosing a successor as a reward for long-term employment and dedication without careful assessment can have a devastating outcome.
- Giving Up Control of Your Business
Creating a successor requires time, mentoring skills, and willingness on your part.
- It can be very difficult for you to begin relinquishing control or even daily activities to your identified successor. Even if you are excited about eventually leaving or minimizing your role with the company, this can be a very uncomfortable experience, and you may be tempted to take control back. This, however, will undermine your successor’s ability to learn and assume the new role and can sabotage the transition altogether.
- One of the biggest challenges of any internal transition can be the changing relationship with your employee-now-turned-successor. Since the successor is used to the employee role, he or she may readily fall back into the employee role when you are still present, especially when circumstances call for a difficult decision. This doesn’t provide the needed opportunity for the successor to change and grow into this new role. You will need to develop a full succession plan to help guide this process.
- The successor usually is a much younger person and may wish to embrace new technology or implement formal planning, marketing, and/or management tools. This can be uncomfortable if you perceive such changes as a challenge to the way you have always done things. Businesses must change in order to have continued growth, and this can cause an internal struggle.
Any transition can have challenges and problems, but an internal transition certainly has some that are unique because of the familiarity between you and your successor. The established relationship must evolve if the transition is to be successful. Internal business sales sometimes fail because the owner and the successor cannot overcome some of the challenges outlined here.
Every sale of a business is unique and requires a specialized plan and time to achieve a successful outcome. Your future and the future of your company will depend on the success of this transition. Plan early and seek qualified outside advisors for assistance to ensure your success.