|
Why Owners Don't Sell Their Companies to Employees
 The final article in a series about selling your company.
In the first two articles of the series, you learned why business owners want to sell their companies to their key employees and why they actually do sell to their employees.
In this final part of the series, you will learn reasons why owners decide not to sell their companies to their employees.
If you are considering or are in the process of transferring ownership to key employees, pay particular attention to the following seven obstacles that can derail this process.
- Owner’s Intolerance for Risk. Owners whose transfer goals include taking their “chips off the table” may choose to forego a sale to key employees if they are focused on reducing risk.
Perhaps they lack the time necessary to make sure that this type of sale can generate the retirement funds that they want or need.
More likely, they are unaware that exit planning methodologies exist and that, with the help of experienced advisors, the risk of non-payment can often be less than in a third party sale. Advisors skilled in The Seven Step Exit Planning Process™ understand the methods of minimizing that risk but some owners remain unwilling (or unable) to endure a long-term, unfunded buy out.
- Successor’s Intolerance for Risk. Despite an owner’s best efforts to identify, train and retain successor employees, some (probably most) employees prove unwilling to take on a significant level of entrepreneurial risk. This often takes owners by complete surprise.
In order to avoid this surprise, owners should discuss with their designated heirs apparent exactly what it means financially to become an owner. They should then allow the heir/employees adequate time to judge whether ownership is really what they want.
- Significant Growth. The business has grown beyond the capabilities — financial, managerial or otherwise — of the existing management team. This is frequently the case in family-owned and smaller companies that have not had the resources to train existing employees or to attract highly-skilled and experienced talent.
- Owner’s Financial Goals. In some cases, owners determine that the after-tax cash flow of the business is insufficient to satisfy their financial goals. This can happen if the owner’s financial demands increase significantly or if internal or external conditions that support cash flow deteriorate.
Acquiring management will use this after-tax cash flow to buy, at least at the outset, the company from the owner. If the owner questions the KEG’s (Key Employee Groups) ability to continue that cash flow ― or the industry’s cycle, the local market’s continued well-being, or any other factors which might depress the ability of the business to maintain cash flow — the best alternative may be to sell to outsiders and “get the heck out of Dodge.”
- Merger and Acquisition Market Conditions. Some owners on the road to a sale to key employees realize that they can reap more cash ― and experience less risk — via a sale to a third party. This usually occurs when the merger and acquisition market enters its boom phase ― when valuation multiples increase and deal terms become more favorable to sellers.
- Third Party Benefits. Other owners, also presumably on the road to a sale to key employees, realize that a sale to a third party will not only yield them more cash but will provide their employees with appropriate and significant benefit.
New ownership may provide benefits that include: new incentives to management at a level that would be unavailable if the business had not been sold; “upward mobility” within the structure of a much larger organization; greater employee benefits in general for all employees; greater opportunities for individual growth; and a more stable and better funded company.
- Owner’s Priorities Change. Finally, an owner’s priorities may change, thus leading to a change in the desired successor. Whereas an owner may initially have wanted to continue the company’s culture, he may now prefer to take the company to the next level while simultaneously taking some chips off the table. Doing so requires an infusion of capital — just the opposite of the distribution of capital necessary in the sale to employees.
To sell to key employees or not to sell? That is truly the question. Look to skilled advisors who have been there to help you choose the best exit path. Work with these advisors to ensure maximum return on the sale for you.
- To read why owners say they want to sell their companies to key employees, the first article in the series, click here.
- To read why owners actually do sell their companies to key employees, the second article in the series, click here.
Ken Stiefler is president of eXITS, LLC and Stiefler Financial Solutions in Denver and has worked with business owners for more than 21 years to help them achieve their financial and succession objectives. Stiefler is an affiliate member of the Business Enterprise Institute Network of Exit Planning Advisors and the Home Builders Association of Metro Denver. For more information, call Stiefler at 303-695-6994, or visit his web site at www.kasfinancialsolutions.com.
NAHB Has More Than 170 Resources to Help You Run Your Business More Profitably
Go to NAHB's Business Management Tools Web pages (available to members only) for instant access to more than 170 timesaving, moneymaking and cost-cutting business resources to help you run your business more profitably. Get guidance on accounting and financial management, business strategy, computers and information technology, customer service, human resources and more.
Resources are added weekly, so bookmark www.nahb.org/biztools to go directly to these vital business management resources.
Local and state home builders associations can link directly to www.nahb.org/biztools from their Web site and give their members instant access to these resources. It will make your HBA's Web site the place to go for the information and guidance that members need to succeed.
Subscribe to NAHB’s Business of Building e/Source
NAHB’s Business of Building e/Source is your monthly electronic guide to the hot issues and emerging trends in home building business management. You’ll find practical advice, tricks of the trade and sound business guidance — all delivered monthly, straight to your desktop, in a quick and easy-to-read format. Business of Building e/Source is available free to NAHB members and their employees. To subscribe, visit www.nahb.org/BoB on the Members Only side of the NAHB Web site.
|
