Often when we meet with potential clients and do our initial compatibility analysis to ensure that our services are a good match for the company’s, we are frequently told, “I sure would like to take care of my wonderful, loyal employees and sell the business to them.” Although we find this to be a noble sentiment, as history has shown, selling to one’s employees carries big potential risks.
Who Will Be Your Successor?
First, unless you have groomed an individual to be a solid CEO type person to replace you, management by committee usually does not yield much success.
I once spoke with a business owner who indicated to me that his VPs were interested in acquiring his interests and running the company. Turns out he had three key folks, a VP of Sales, VP of Operations, and a VP/CFO. Each of them was very skilled in their particular vertical.
But as I began to delve deeper into the relationship, it became apparent that although they had all been with the company for some time, their individual personalities did not mesh. As we counseled him on this situation, he eventually talked himself out of this idea because he realized that it would only lead to eventual strife and the company would suffer, as well as his business legacy.
Are You the Bank?
Post transaction success is especially vital to the ex-business owner when he or she exits via an employee buyout, which leads us to the second major risk when you sell a business to an employee.
Odds are good that you personally will have to finance the transaction; meaning you will be carrying paper on the deal for several years and your buyout will most likely be contingent on the company growing at a good clip so that the new employee-owners can make the quarterly payments that are due to you.
Be honest with yourself: Do any of your employees, even collectively, have the capital available to outright purchase your shares of the company today? Odds are good that they do not. We rarely see employees with the capital to pay.
So this means that you might get 10% down at sale, and the 90% (hopefully with interest) spread over a five-year timeframe. Do the math on what this means. Usually it is the spouse that helps the owner see the folly in this deal structure. They say, “You mean that dream house we were going to build by the lake will have to wait five years?”
A tough reality to face.
What About Experience?
Finally, even if you have a key employee who can raise the capital (maybe he or she has a rich aunt with money just sitting in the bank), do you trust the legacy you built on someone with zero experience as a CEO?
As you know, being a great VP of Operations does not necessarily make you a successful CEO. In most cases, it is far better to let the VP of Operations continue to thrive in that role under an experienced new owner or ownership team that will provide him with the capital and funding to reach his full potential. Promoting him to owner/CEO could be the worst thing for his career.
Obviously you feel a desire to reward your loyal employees and a new owner definitely has an intrinsic interest in seeing them stay post sale. However, there are lots of ways to structure a transaction where you pay bonuses to your key people, or you have the buyer create new compensation plans that reward them for staying post acquisition.
If you are several years away from an exit, there is always the creation of phantom stock. Phantom stock or phantom equity is a method that allows you to give your employees shares of non-voting stock, which they can redeem later, usually when thecompany is sold or when the employee retires, assuming the employee is fully vested. Unlike traditional shares that need to be repurchased when an employee leaves or is terminated, phantom shares essentially disappear upon certain triggering events.
Generational Equity (part of the Generational Group) does not provide tax and stock structure advice. Before you consider doing any sort of stock sharing plan, consult your CPA and attorney. While talking with them, bring up the subject of phantom equity as an option. It is not widely known and has many benefits.
One of the biggest benefits of creating a phantom stock program is that it is far less costly than creating an ESOP. And, since these are non-voting shares, you can still make key decisions without getting the approval of your employees.
It is this last point that is vital to consider. If you provide company stock to your employees, depending on the way you structure it, they technically become owners. We have seen horror stories where a majority owner decides to sell but is unable to do so because he can’t get approval from the 20 other employee owners.
Don’t fall into that trap. Reward your key folks in ways that also protect and benefit you and the company legacy.
Time and space do not allow me to cover all the other ideas of how you can reward employees AND close an optimal deal. If you would like to learn more about this topic or how to successfully exit your business using any method, I recommend that you attend a Generational Equity succession planning conference. These are designed to educate business owners on the key steps involved in how to plan, and execute, a successful and profitable exit. To find out if you qualify to attend, please call and speak to one of our senior business advisors at 972-232-1121.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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