Succession Planning and Your Key Employee(s)
Selling Your Business to Key Employees From the Perspective of Both the Seller and the Buyer
On the face, it seems like it should be a simple conversation. We have an entrepreneur who set out on his or her own and built a thriving business. But now that owner eventually exits, either voluntarily or involuntarily.
When clients tell me they are retiring from the business they created, I always ask why they’re retiring. Sometimes they’re retiring because the business is taking too much out of them, or because of a government bureaucracy they’ve grown tired of fighting with, or a feeling/conclusion that the business needs fresh blood. Others are retiring to start another small business they’ve been planning out for years, to take the trip they’ve always dreamed about, or to spend more time with the kids and grandkids.
Some clients I’ve spoken to acknowledge their lack of succession planning. The reason(s) is often an avoidance of the issue of what comes next. That’s a big issue. As we look at retirement, one day a person is helping others and is busy working, and the next day they are left with only a future yet to be created.
When looking at the prospect of selling your business to your key employee(s), it doesn’t have to be here today, gone tomorrow. It’s quite possible to groom a staff member to become the owner of your firm. The transition of ownership as well as the responsibilities of managing the firm can come over the course of several years if the planning for that transition begins with enough time before your eventual “retirement”.
Overcoming Obstacles to Selling to a Key Employee(s)
I’ve often heard that business owners can’t get the best price for their business when they do an internal sale to a key employee. The numbers are too large, the financing is hard to come by, or they’d have to finance the deal themselves when another party might be willing to come in and offer cash.
Internal successions can work, and work extremely well. They need more foresight and time to work than an external sale, but that effort can pay dividends for you and your staff. It’s not likely that you can get an internal sale completed from beginning to end, within a year. With a longer time horizon, (say 3 to 5 years), an internal sale can be more feasible. A young buyer can benefit you as the seller from a tax standpoint by spreading the taxable gain on sale over several years and can allow the seller to retain some influence on the enterprise they have nurtured for so long.
The Employee Who Wants to Be a Future Owner
As an employee, are you prepared to accept the additional hassle that goes with the ownership of a business, including the obligation of spending time on the less enjoyable parts of running the business (including hiring/firing, negotiating with vendors, etc.)? Here is where an open and honest dialogue about being a business owner can be beneficial between creators and future successors.
Discussions with your spouse are also essential when approaching this subject. While you may have the stomach for the risk, does he or she? How would your spouse feel about acquiring additional debt in order to finance a transaction? As a potential buyer, you owe it to yourself, your family, and to the business owner whose firm you are considering buying to do your own work and think deeply about these issues.
My insight as a legal counselor who opened his own firm years ago is that if you’re going to be an entrepreneur, you really have to want it. You have to want to be your own boss enough to fight through all the small yet essential tasks that seemingly get in the way of working the business. Things like dealing with banking relationships, technology integration, marketing activities, employees, etc. The list literally goes on and on.
Ultimately, there is not a right or wrong answer. I’ve got friends who are grinding out careers in private and public business. I’ve got other friends who are working through internal succession plans and are purchasing businesses that they’ve been a part of for their entire careers. Success is possible in all situations, if it is the right situation for you, your family, your personality, and your life’s vision.
A Sell/Buy Agreement and a Preliminary Statement of Guidelines
Discussing the sensitive issue of selling/buying a business to key employees is difficult and delicate. It requires great trust on both sides and great openness. I’d propose the following statements as a guideline for both the existing business owner and prospective business owner.
- I promise to treat these discussions with the confidentiality and care that we would give to our employees.
- I promise to make appointments in advance to discuss our potential transaction, and I promise to honor these appointments with our customers.
- I promise to be as prepared for our discussions as I would be for our regular weekly meetings.
- I promise to make every effort to see things from your point of view and ask for permission to ask (sometimes personal) questions that help me gain a better understanding. I promise to understand if you need some time to think through your answers.
- I promise to understand that you’re going to ask me some uncomfortable questions, and I promise to answer them honestly. I also promise to ask for some time to reflect and gather my thoughts when needed.
- I promise to be a true professional regarding the outcome of this process. I acknowledge the outcome of this process is uncertain. I acknowledge the possibility that we may not be able to reach an agreement on this transaction, and to make every effort to not allow these discussions to color our working relationship if a transaction is not consummated.
Do you have a question(s) not addressed here?
Fredrick P. Niemann Esq.
If so, contact Fredrick P. Niemann, Esq. toll free at (855) 376-5291 or e-mail him at fniemann@hnlawfirm.com to schedule a consultation about your business succession thoughts. He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to. He’s proactive, experienced and creative to make your goals, your reality. Call him today.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Business Law Attorney