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?”
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.
Continue reading “Planning For The Tax Efficient Insider Sale!”