The Surprising Favorite: Transferring the Business to Management or Key Employees

Submitted by John Brown on Tue, 08/01/2017 - 6:00pm
Management Business Transfer

Many, perhaps most, business owners shy away from selling their businesses to key employees (usually their management teams). This is a normal and prudent reaction. After all, employees seldom have enough money or experience to buy and run a company. Yet, the Exit Path most owners choose when undertaking Exit Planning with BEI Members is a transfer to management/key employees.

Business owners and advisors who reject such transfers out of hand do so because the normal transfer mechanism—sell stock for a small cash down payment, with the bulk of purchase price owed to the seller in the form of the buyer’s promissory note—is risky. In this scenario, owners lose control of their companies and new owners may not be successful, which results in owners receiving much less than full value for their companies.

Fortunately, The BEI Seven Step Exit Planning Process™ uses strategies and designs that keep business owners in control of their companies until all of their goals and aspirations—most fundamentally, financial security—are achieved. As is true with all BEI Exit Path designs, the Exit Planning Process for transfers to insiders reduces risk and provides significant benefits to the owners who take this Exit Path (often even greater benefits than do other Paths).

Sticking With What You Know: Benefits for Business Owners

The most common benefits to owners who choose to exit via a transfer to insiders are:

  • They sell to a person (or people) they choose and trust. This is not always true in a third-party sale.
  • Owners maintain control of their companies until they attain financial security.
  • Owners achieve many of their values-based goals. These goals can include keeping the business in the family or the community, or continuing a culture or legacy.
  • Insider transfers give owners more time to sell, which provides two benefits:
    • Owners can continue to receive income in the form of S distributions, which they need in order to accumulate cash outside their companies.
    • Owners can change their roles and responsibilities as the experience and capabilities of the incoming owners increase.
  • Insider transfers motivate key employees to stay with and grow the company, since they will one day own the business.

In addition, business owners benefit by working with BEI Members. That’s because insider transfers designed by BEI Members:

  • Do not prevent a business owner from exiting via another Path. Those Paths remain open until control is transferred to the new owners.
  • Provide flexibility, including the ability to halt the transfer process should the incoming owners prove unwilling or unable to run the business, or business cash flow does not increase according to plan.
  • Provide successor ownership if the owner dies before his or her planned exit.

Taking and Making Work: Benefits for Advisors

Advisors who participate in planning an insider transfer benefit in three ways.

Proof of Value

Many owners want to exit their businesses via a transfer to insiders. Knowing how to design these transfers allows you to provide owners with the solutions they want. Once they realize you can help them achieve their goals and overcome the inherent risks, they’re much more open to becoming a client.

Expertise Enhancement

Like Exit Planning in general, no single advisor can expect to plan an insider transfer alone. Instead, successful transfers to insiders rely on a planning process that focuses on achieving all of a business owner’s goals and aspirations. The BEI Seven Step Exit Planning Process involves a host of personalized designs and tools that provide Exit Planning Advisors with ideas, recommendations, and tools specific to insider transfers, enhancing your expertise and allowing you to bring the best Advisor Team members into the fold.

Insider Transfers Take and Make Work

Minimizing risk and taxation, building value, and transitioning responsibilities to employees motivated to grow value take work. These processes create a need for more of your core services, products, and tools. Insider transfers incorporate these processes as essential parts of the insider-ownership design, creating more opportunities for you and your firm to provide and collect fees from your essential services.

In the next article, we’ll discuss a variation of the insider transfer: a transfer to family members. Throughout this series, we’ve highlighted the advantages of The BEI Seven Step Exit Planning Process for owners and their advisors. We’ve discussed the importance of setting goals, why determining the Asset Gap is critical to a successful business exit, how increasing business value and cash flow benefits owners and advisors, why Value Drivers matter, minimizing threats to business value, and the nuances of a third-party sale.


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