Many business owners facing imminent exit have the enviable but difficult choice of either selling the business to an outside third party and achieving their financial objectives or, conversely, transferring the business to loyal, motivated, key employees or family. This is nothing more, or less, than a clash of exit objectives.
Take John Conover for example. John Conover’s automotive after-market business succeeded beyond his wildest dreams, and just as he started thinking about throttling back, a much larger and well-respected company offered to buy his business at a price that met all John’s exit planning objectives. John hesitated because he really wanted to sell the business to his management team, a group of three capable, loyal, long-term employees, one of whom was his son.
The management team sale presented one simple problem: they did not have enough money. John’s objectives seemed hopelessly conflicted. Should he please his pocketbook or follow his heart?
This is a common problem in businesses with sufficient value to attract third party cash buyers or mergers and acquisitions brokers. The important lesson here is that an experienced advisor can help you understand and compare various options to resolve these seemingly conflicting exit objectives.
In John’s case, the would-be buyer was eager and even insistent, e current management team stay with the business through the sale process. Because of its greater size, the buyer could offer the key employees greater income and benefits. Further, John wanted to reward with cash his son, the key management team, and several long-term employees for whom ownership was not practical or advisable.
Using readily available estate planning techniques, John gave about ten percent of the company value to his son. Thus, his son was poised and funded to begin his own company if he chose not to remain with the new owner.
Upon reflection, John realized what he really wanted was to reward key employees for the value they added to the company rather than actually selling them the company. He also realized the insider transfer could potentially burden his son and employees with a mountain of debt. This was hardly a risk-free transaction! By gifting to his son and providing deferred compensation to his key employees, John not only attained his financial and departure objectives while minimizing his risk, but he also provided a generous bonus to his key employees and a jumpstart to his son’s new business, while helping to minimize their risk as well.