An often adopted exit strategy for a founder of a small business is to sell to a group of employees who have expressed a desire to be the future owners. Factors to be considered in assessing the viability of this strategy for the selling owner(s) include their personal financial goals, risk tolerance regarding payment of sale proceeds, and the buyers' capabilities to be successful business owners. Another risk factor most often neglected is whether the employees, who may be working well together, will succeed as business partners. It’s one thing to become a sole owner when you’ve never owned a business; it’s another when buying a business with partners. If they do not work out well as partners, the selling owner(s) may not receive the expected sale proceeds.
Following are common challenges inherent to a business partnership that should be thoroughly considered in assessing risk for the selling owner(s) as well as the critical employee buying group before a deal is ratified:
Differing Visions and Goals:
Challenge: Partners may have different long-term goals for the business or personal ambitions that lead to disagreements about the company's direction.
Impact: Conflicting visions can lead to indecision, confusion, and a lack of clear strategy, potentially stalling growth.
Unequal Work Contributions:
Challenge: One partner may feel they are contributing more time, effort, or resources to the business than the other.
Impact: This imbalance can create resentment, mainly if profits are split equally despite unequal contributions.
Financial Disagreements:
Challenge: Partners may have different views on managing the company's finances, including how much to reinvest versus how much to take as profit.
Impact: Disagreements on financial matters can lead to cash flow problems, missed opportunities, or one partner feeling financially shortchanged.
Profit Distribution Conflicts:
Challenge: Even if partners contribute equally, disagreements over profit-sharing can arise, particularly if one partner feels their contributions are undervalued or not receiving fair compensation.
Impact: Profit distribution disputes can strain relationships and damage the partnership over time.
Decision-Making Conflicts:
Challenge: Partners may struggle to agree on critical business decisions, such as product development, marketing strategies, hiring, or expansion.
Impact: These disputes can lead to delays in decision-making, reduced efficiency, and missed opportunities in the market.
Personal Relationships and Emotions:
Challenge: Personal relationships can become intertwined with business decisions, making separating emotions from professional judgment difficult.
Impact: Personal issues may spill over into the business, leading to emotional conflict, reduced productivity, and strained professional relationships.
Responsibility and Accountability:
Challenge: Clarifying each partner's role and responsibilities can be difficult, especially in the early stages of a business.
Impact: Without clearly defined roles, tasks may be neglected, or partners may duplicate efforts, leading to inefficiency or confusion.
Trust and Dependency Issues:
Challenge: Partnerships rely heavily on trust, and if one partner acts unethically or irresponsibly, it can lead to a breakdown in trust.
Impact: A lack of trust can lead to micromanagement, unnecessary oversight, or the dissolution of the partnership.
Exit Strategy Conflicts:
Challenge: Partners may have different plans for exiting the business, whether through sale, retirement, or transition to new leadership.
Impact: Without a clear exit strategy agreed upon in advance, disputes can arise when one partner wishes to leave or sell their share of the business.
Legal and Liability Issues:
Challenge: In many partnerships, each partner may be personally liable for the business's actions and debts, which can pose a risk if one partner makes poor decisions.
Impact: Personal liability can lead to financial strain, lawsuits, or bankruptcy if the business fails or a partner engages in risky behavior.
Communication Breakdowns:
Challenge: Partners may fail to communicate business goals, issues, or concerns effectively.
Impact: Poor communication can lead to misunderstandings, misaligned objectives, and unresolved conflicts, which may damage the partnership over time.
Cultural or Values Misalignment:
Challenge: Partners may have different business ethics, customer service, or company culture approaches.
Impact: A lack of shared values can lead to disagreements and difficulty in establishing a unified brand or company culture.
Decision-Making Paralysis:
Challenge: In equal partnerships, both partners may need to agree on major decisions. If they consistently disagree, the business may experience decision-making paralysis.
Impact: This can slow down the business's ability to respond to market changes, innovate, or capitalize on opportunities.
Growth and Scaling Challenges:
Challenge: Partners may have different ideas about how fast the business should grow or how to manage growth.
Impact: Misalignment in growth strategies can result in either overexpansion (leading to cash flow issues) or stagnation (leading to missed opportunities).
RISK Mitigation Strategy:
Partners can build a more harmonious and successful business relationship by proactively addressing these potential issues. To address these challenges, ENNIS Legacy Partners facilitates The Partnership Charter in our process for assisting an exiting owner(s) in deciding whether selling the key employees is the ideal route for exit. The process also serves the employees interested in purchasing the business to determine if they could be future business partners.
SCHEDULE A VIDEO CONFERENCE TO LEARN MORE ABOUT THE PARTNERSHIP CHARTER HERE.