The Perils of Waiting Too Long: How a GM Outmaneuvered the Business Owner

Background 

A business owner, after years of running a successful company, faced unexpected health challenges. While not life-threatening, these health issues led her to step away from the day-to-day operations. During her absence, the general manager (GM) took full control, managing employees, handling customers, and ensuring smooth business operations, which the owner saw as a blessing. Even after she recovered, the owner never stepped back into the business in a significant way. So over time, the GM became the trusted leader in the eyes of both employees and customers—while the owner was nearly forgotten in her continued absence.

By the time the owner was ready to sell, she approached the GM with terms and conditions for the sale. However, the GM realized that he was now holding all the trust and influence, and refused the deal. Instead, he pointed out that he could easily start his own business, take the employees and clients with him, and avoid paying for the company entirely. The owner was left with little negotiating power and ended up selling for significantly less than she could have a few years earlier.

Key Issues

1. Loss of Control: The owner stepped too far away from the business, allowing the GM to take full operational control and build stronger relationships with employees and customers.
2. Lack of a Non-Compete Agreement: Without a non-compete in place, the GM had no legal barrier preventing him from leaving and starting his own competing business.
3. Failure to Implement a Succession Plan: The owner did not outline a clear path for the GM to earn ownership.
4. Missed Opportunity for Gradual Transition: The owner could have structured an ownership plan where control was passed gradually as payments were made, ensuring that she received a fair value for the business.

Recommendations

• Stay Involved: Even if stepping back from daily operations, business owners should remain engaged to maintain influence and control.
• Compensate Key Employees Appropriately: Rewarding key employees with bonuses or equity (with conditions) ensures their continued commitment.
• Use Non-Compete Agreements: These agreements can serve as a barrier to prevent key employees from taking the business’s core value—its clients, key products/services, and workforce. Note that you may have to transfer equity to your key employees in order for their non-competes to be enforceable.
• Structure a Gradual Ownership Transition: You may be able to use non-voting shares or other types of equity to enable ownership participation without giving up control until you are substantially or fully paid.
• Plan Early: Waiting too long to structure an exit plan and succession strategy can leave you vulnerable, reducing your ability to negotiate a fair deal when the time comes for you to fully step away from the business.

Key Takeaways 

This case highlights the importance of maintaining some level of control and leverage when preparing to sell a business. Owners should take a proactive approach to planning for their business exit, ensuring they retain control while providing clear incentives for key employees to remain engaged. Structuring ownership transfers carefully will protect the value of the business, and their position in the organization. By implementing these steps early, business owners can avoid losing negotiating power and ensure a smooth, profitable exit. With proper planning, a business transition can be a win-win situation, benefiting the owner, the future leadership team and the business.

Want to learn more? Get our guide, The Selling Process – An Overview for Business Owners, which can help you understand the intricacies of the selling process and how to make an educated decision on one of the most important aspects of your sale – finding the right buyer for your business.

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