Deciding on an exit route of a sale to insiders or children can be more complicated and less expedient than a sale to a third party. There are not a few key planning issues when considering this exit option SUCH AS:
Will the owner’s financial goals be achieved?
Is the business cash flow strong enough to support a transaction?
How can the transaction be structured to minimize taxes?
Along with questions like these, that can be more directly related to the owner, there are issues pertaining to the successor or successors that can at times be somewhat taken for granted, or assumed, by the current owner:
The willingness of the successor(s) to be an owner
The readiness of the successor(s) to be an owner
It is not uncommon for an owner, who has assumed both the willingness and readiness of a successor(s), when eventually proposing a potential ownership transition, to learn those successor candidates either don’t want to own the business, or they’re far from ready to be owners. This of course can completely derail the hoped-for exit timing and plans of the current owner. And, it can result in the owner being required to come back into the business if indeed the transaction moved ahead without these issues being thoroughly addressed prior.
The successor(s) willingness and readiness questions are often neglected, but not always. There is another successor issue however that is almost always overlooked, and it is fundamental for the future success of the business and ownership transition: Can the successors (if there is more than one) be successful as partners in the business?
If an ownership transfer involves more than one insider (key employees and/or children), the fact that they’ve worked well as co-employees does not ensure they will be as cohesive and collegial as co-owners. When we raise this issue with owners, they immediately “get it” as they often have had their own experiences with partners or they’ve heard stories. This is important because in most insider sale transactions the selling owner needs the business to continue to do well, as part of the sale price is almost certain to be self-financed. And, if the business falters or fails the selling owner may not get paid. So, it is essential that the new owners function well as partners.
Following are a few key areas for potential successor partners to consider prior to moving ahead in purchasing the business:
Alignment of vision and direction for the business
Personal core values
Roles, authority, accountability, and expectations
Contributions and rewards
Governance
Personal styles, strengths, and weaknesses
Managing conflict
Money
A process to discuss these issues, which are central to any partnership, would benefit the successor partners but also the selling owner who has a vested interest in seeing the new owners and the business continue to prosper. The Partnership Charter provides such a framework for discussions, negotiations, and agreements. Please do not hesitate to contact us for further information.
Invest 12-15 minutes and complete the FREE ExitMap® Assessment and receive a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.
