The sale of your business to an insider requires the simultaneous presence of a capable insider purchaser coupled with your intention to exit. The reason is the “capable insider” who wishes to purchase your business is not interested in hanging around forever waiting for you to decide to sell. Without a solid commitment from you on the timing of your exit, prospective purchaser will ultimately become disinterested.
There is also the possibly of you having to finance part of the purchase price. Chances are that you will be helping finance part of the sale, which represents actual years after your exit, which you are tied to the company.
Using a two-tier system for the purchase of your interest!
Under a two-tier purchase system, a portion of your stock would be transferred to your inside buyer initially, and the balance would be transferred when the business is sold.
By using the two-tier purchasing system, there are a number of advantages:
- Providing stock ownership to a key employee today can provide incentives for better job performance.
- It can help reduce the risk that they will be attracted to a job offer from a competitor and ultimately leave you with your company secrets.
- Improves the likelihood of a bank financing the balance of their purchase in the future at your final exit.
- It gives them “skin in the game” when they contribute some of their funds to purchase some of the stock, giving them additional motivation to help the company be successful.
- Allows you to become a mentor to your key employee to further develop their skills under your watch, while still controlling the company.
Minority Shareholder issues
By arranging a Buy and Sell Business Continuity Agreement, you can arrange for the purchase buy back of the stock should the key person leave the company. This will ensure that ultimately you will end up with the stock.
Does the key employee want to be an owner?
You don’t want to assume the key person wants to be an owner, no matter how long they have been with you, and the positions they held. Some owners assume the well-versed employee will be the heir apparent automatically. Just because this talented employee acts like an owner, doesn’t mean they want the responsibility of one. However, asking the key employee if they are interested in the business is a start to the process if the key person has an interest.
Even though the employee has the desire to be an owner, you really have to evaluate if they can run the business and be a good owner. If you feel they don’t have the capability of being and owner currently, it doesn’t mean they can’t be developed under your mentorship. On the other hand, if you feel the key person can’t be the potential owner, you need to face the facts and move on.
Sometimes, good people, just don’t have the ability which is necessary to be a good business owner, if you recognize this in your key person, you might consider them as a “next middle management candidate”.
By developing them into this role, and giving them incentives to stay with you, you will be rewarded in the future when you do sell your business. Great “key groups” are what new purchasers look for when they are considering buying a business.
Incentives To Key People
Giving key people incentives keeps them in the game as far as treating the business like their own. This helps you grow the business. Benefits like deferred compensation, phantom stock ownership plans, and stock- appreciation right plans, allow you to create a culture of appreciation and loyalty with your key group.