Successful business owners often have an appetite for control. As leaders, trailblazers, and rainmakers, business owners are used to having control over their success, and many of them will do whatever they can to maintain that control and success. For these kinds of owners, insider transfers can be an appealing and fulfilling Exit Path. In this article, we’ll look at three ways insider transfers keep business owners in control of their destinies. We will also consider roadblocks that appear when owners try to take too much control, and how they can find their happy medium toward a successful business exit.
How Insider Transfers Keep Owners in Control
When business owners commit to an insider transfer, it gives them more control over three aspects than does selling to a third party. Specifically, it gives owners more control over:
- Their chosen successor.
- Their values-based goals.
- Their financial futures.
Additionally, when business owners commit themselves to properly planning for an insider transfer with help from a qualified Exit Planning Advisor, they can achieve financial independence while maintaining control over these aspects. But why would owners want to keep control over these three aspects, and how can they do it?
Keeping Control Over the Successor
Transfers to insiders give business owners the most freedom to choose their successors, whether that means passing the business down to a child or transferring ownership to a loyal and worthy employee. For many business owners, getting to choose who takes over after they leave is essential to a successful business exit. In other words, they could receive all the money in the world for their businesses from a third party and still consider their exits a failure if they don’t get to directly choose their successor.
There are some conditions that business owners must consider when choosing their successor. The most important and most overlooked condition is determining whether their chosen successor wants ownership. It’s surprisingly common for business owners to choose a successor in their heads only to find that their chosen successor doesn’t want any part of ownership. Avoiding this obstacle can be as simple as asking potential successors whether they ever imagined owning the company in the future before beginning to plan as if they want ownership.
Another condition is considering whether the chosen successor is fit for ownership. For instance, a key employee may be excellent in the role she’s currently in and have interest in ownership, but may not have the skills to run an entire company. Another common example is a child who feels entitled to ownership failing to prepare himself for the responsibilities of ownership. Business owners must resist the temptation to follow through with an unqualified successor just because they’ve always wanted to transfer the business to that person. They can avoid this by consulting with their advisors about what a strong successor should look like and do, giving their chosen successor a chance to run the company for a trial period while the owner takes an extended vacation, or even having their Exit Planning Advisor construct an Advisor Team to find a successor that the owner is ultimately comfortable with.
Keeping Control Over Values-Based Goals
Some business owners place more importance on fulfilling their values than getting the maximum payout for their ownership interest. While no business exit can be considered successful unless the owner achieves financial independence, many business owners would rather take less money to assure that their successors abide by their values than sell to the highest bidder. However, owners must understand how their values play into their decisions to take control of them.
This is one of the trickier aspects of Exit Planning for business owners. Ownership transfers lean heavily on financial goals and with good reason. But years of Exit Planning show that money isn’t the only driving factor for exiting business owners. Thus, owners must examine which values are most important to them in the context of financial security. This is where working with an Exit Planning Advisor and Advisor Team is crucial. Through an Exit Planning Advisor, owners can consult with numerous professionals about what’s important to them, and those professionals can use their strategies and expertise to turn owners’ values and financial needs into a workable plan.
Another positive outcome owners experience by working with Exit Planning Advisors and Advisor Teams is discovering values that they didn’t even know they had. For example, it’s common for business owners to say they want to sell to a third party for a max payout, only to find that the buyer wants to drastically change the business’ culture and eliminate a swath of loyal employees. This is the kind of revelation that can derail an Exit Plan. But it’s also the kind of revelation that owners can make early in the process by working with an Exit Planning Advisor. Exit Planning Advisors have seen situations like this play out numerous times while helping owners plan their exits and have the resources to address these issues before they become problematic.
Keeping Control Over Their Financial Futures
Insider transfers give owners flexibility and control over their financial futures. When transferring to insiders, most business owners will notice that they will rarely, if ever, get all of the sale price immediately. Most insiders don’t have the money to pay up front and will need to use promissory notes and the company’s future success to pay the owner for ownership. For owners who want control, this is a win-win. They get to have a say in how the business functions until they are completely cashed out. They have the option to audible to a third-party sale or different insider group if the first successor proves incapable. Perhaps most importantly, they only have to do things they want to do within the business while letting the new owners handle aspects they weren’t interested in doing, all while accruing payment for their ownership interest.
While all of these aspects can be appealing to owners who crave control, owners must commit to thorough planning and preparation to reap these rewards. Insider transfers often require strong incentive plans, the ability to appropriately identify strong and willing leaders, and time to succeed. Exit Planning Advisors and their Advisor Teams can guide business owners through the planning and implementation necessary to stay in control of their exits through an insider transfer.