If you’re a business owner with a desire and vision for selling to key employees who have helped you build the business, the following is a short list of important issues to seriously consider prior to moving forward. And, the sooner you begin the greater chance of a successful transition.
Identify and test your assumptions. For example, it’s not uncommon for owners to assume that employees want to buy and own the business. Often this simply isn’t the case due to differing values, life goals, risk tolerance, etc. You and they will be better served if this is established sooner rather than later. It’s not unusual for key employees to prefer a cash-based incentive plan such as Phantom Stock, particularly if they are approaching an age for retirement.
Employees may be enthusiastically willing to become owners, but perhaps not equipped or even well suited to become owners. Facilitating an objective evaluation of their skills and characteristics, and professional coaching if needed, early on in your process is advisable.
Avoid making premature and unsubstantiated promises about ownership, either written or verbal, that can result in employee expectations of ownership.
Be clear on common mistakes to avoid such as selling too much too soon and giving up control prior to realizing goals or including employees in the buyers’ group that will not work well as partners (see the Partnership Charter).
Be clear on your own risk tolerance. For example, how much $$$$ of a deal would you be willing to self-finance, and for how long? Forecasting business cash flow with a “sanity check” on how the business would financially support the transaction will help you decide how much risk you’re willing to take on.
These are things you could do on your own without assistance, but a safer and risk-averse way to proceed is to engage professionals who can identify and test your assumptions, what you know and don’t know, and then provide advice as to how to proceed wisely.
