One important issue an owner can spend their time on, is getting the right people to fill the right positions in their company, while removing the wrong people from positions.
Situations are always changing and can change the dynamics of the business. For example; the retirement of a key owner or other key employee, the unexpected loss of a key person due to death or disability can pose a significant financial hit to any company. Planning can reduce the adverse impact.
Continuity of leadership is important. Having a backup for the key positions would be ideal. Sometimes you don’t have the personnel to accomplish this. A company training program can be a valuable tool for the long-term growth of the company. Cross training is worth the time. Having personnel filling in for important jobs when needed is a valuable element for the business growth.
Trader Joe ‘s is a very good company and a great example of a company with interchangeable job descriptions. Employees learn multiple jobs and task. They rotate their jobs every few hours on the employee’s shift. They create teams, with captains and the team helps with on the job training for the e different jobs. Their education is ongoing. Trader Joe’s has a bench ready to go. This is also done with their management team. Their candidates are always being educated to move up the line and into the position.
Board of Directors
Having an active Board of Directors can help with guidance in implementing employee growth. This is next level management. This is a value driver which is of importance to the growth and value of the company. It is what a potential purchaser looks for in a company that they may be interesting in purchasing.
The board helps provide management continuity and immediate oversight in triggering events, such as divorce, death, disability, or withdrawal. The board can be made up of key insiders and some outsiders who have insight to your business, but not necessarily in your business or industry. Continue reading “Building Your Leadership Team And Going Deep!”
A stock option plan is an option to give the key employees more incentive to stay with your company and potentially purchase your company. Usually the owner will sell to the employee (or employee group), 10%-25% in total. The amount of the stock will always be less than the majority of the stock.
The key person has a better chance of financing future stock purchases from financial institutions by owning this amount of stock in the company. This creates the building blocks of a future sale for the current owner.
This percentage of ownership doesn’t give the key employee control of votes during shareholder meetings. The majority owner can maintain control over the voting as long as the Articles of Incorporation and the Bylaws have been properly structured.
Another options is to issue only non-voting stock to the key employee(s) in Tier 1. By amending the corporations’s Articles of Incorporation, you can issues non-voting shares. You can even do this with S corporation. The one class rule of an S Corp does not apply as non voting stock is not considered a second class of stock for purposes of this rule.
CONTROL IN SELLING YOUR COMPANY
Usually corporate laws generally require at least two-thirds approval by the shareholders when the corporation has a major event as selling the company to a third party. As long as you maintain at least that amount of percentage ownership, will have the ability to control the decision regarding a future sale. Continue reading “Transferring Stock does not mean you have to give up control. “
Selling your business to a key employee, or a group of employees.
Assuming that all of the purchase price is to come from the key employee (s), you can help the purchase, by (a) using a stock dividend distribution, or (b) bonus of money to the employ, such as a bonus executive program. (See Restricted bonus agreement).
It is important that the company have consistent cash flow, (discretionary cash flow;) to use for this purpose. (This is the cash generated by the company which is not needed to run the operations, for debt service or capitalization of the business).
Planning for the sale of the stock to insiders, and cash flow;
It is important to have a accurate idea of the yearly cash flow. For example, if the discretionary cash flow is $1 million a year. You might commit 10% of the company, or $100,000 a year to help pay for stock. Continue reading “Creating Cash Flow In Your Business”
When considering the transfer of stock to a key employee, or a group of key employees, (referred to Key group), you need to determine how much they want to be involved in the company, and the risk they are willing to take in the future of the company.
In Tier One of the purchase, the key group will purchase stock. They purchase stock from future salary, financing, or from future cash flow in the form of dividend payouts.
It wouldn’t be uncommon for the owner to want to see the purchasing employee put some skin in the game. Seeing the employee be committed allows the employer to consider future financial programs to help the employee purchase the balance of the stock under Tier 2 (the selling of the balance of the stock).
The owner in most cases will look at the bottom line what they want in the end and the financial capabilities of the key employee. Smaller employees will try to make it easier for the key person to purchase the stock. Using a bonus plan to help them buy the stock can be a very useful tool for both parties. The employer gets a tax deduction, while the employee has additional funds to purchase equity in the company.
Using lower valuation for a better cash flow when business is sold Continue reading “Key group wants to buy your business, buy do they have skin in the game?”