Business owners nearing retirement owe it to themselves and the hard work they invested to consider all available exit strategies, including a sale to one or more key employees. In Part 1 of this blog series, we presented a number of important reality checks to walk through before passing the business over to a trusted employee.
Once an owner has honestly assessed current circumstances and decides to proceed with an employee sale, the next step is to ensure the transaction supports both seller and buyer(s). Designing a transaction that positions both parties for success can be challenging, but the below concepts are a good road map for practical and manageable succession planning.
Tips to design a successful sale to key employees
- Transfer stock over time: Resist the temptation to sell the entire business with one transaction. Instead, consider selling the stock in small increments over a number of years. This approach not only allows the employee to ease into this new role, but also makes the buy-in more affordable and financially feasible.
- Monetize your ownership value: Beyond the stock sale, you can monetize your ownership value in other ways. Depending on the net cash flow level, options like shareholder distributions, W-2 compensation and partial stock redemptions through the business allow you to reap the benefits of ongoing profitability.
- Move into the absentee owner role: Easing out of the active, full-time owner role gives the key employee(s) the opportunity, responsibility and accountability for significant business relationships and critical decisions. It is viewed as riskier to remove an active owner, so developing a strong management team that is fully engaged in running the company demonstrates that the power, knowledge and access is not concentrated in one person.
- Incent continued strong performance: Develop an incentive compensation program for the key employee(s) based on both financial and operational key metrics. You’ll continue to cultivate the strong leadership and performance qualities that made the employee an attractive future owner in the first place. Whether you award cash or company stock, the program rewards can be used to buy an increased ownership stake in the company.
These concepts can help owners advance their succession planning efforts and achieve their goals of transferring their hard-earned business model into the hands of trusted and loyal key employees or management team members. Just like all succession planning strategies, a sale to a key employee is most effective when thoughtfully considered and carefully implemented. RKL’s succession planning team is available to answer any questions about this method or support owners through the decision-making and execution phases. Contact us today to start the conversation.