SALE TO KEY EMPLOYEES – Business Destinations: The Most Overlooked Aspect of Business Planning

The Vaughn Law FirmUncategorized0 Comments

  • SALE TO KEY EMPLOYEES  If you are going to sell to key employees, i.e. C-level  executives or key management teams, there are a few things you want to keep in mind:

First, you want to structure the business in such a way where the executives can feasibly take over.  Often, owners will do so by bringing executives in on a partnership level, and then allowing buy-out provisions.  At other times, owners will just turn to key managers or key employees and determine whether they wish to purchase the business.  

The key managers might then struggle to identify, well, how do I do what you do? How do I make sure I can run this business? What is my security and confidence level that this business will continue to move forward in the right fashion, particularly if the business is still dependent upon the owner?  This is a reason to try to work toward the business being able to operate independently, but also grooming the management team, teaching them the operations of the business. Not just for your sake to accelerate your independence, but also to develop their confidence and their abilities with the understanding that the vision down the road is that they will be taking over and buying out the business.  Such an undertaking might warrant the protections of a non-compete and non-solicitation agreement to restrict the executive, if available as an option.

The second challenge that comes up is financial: how do they finance a business purchase? You have to make sure that the management team, CEO level executive, whoever it might be, is going to have the financial wherewithal.  There might be some type of lending mechanism. Maybe their retirement benefits are such that they’re going to be able to turn that over.  Perhaps savings or contributions from others. In some fashion, they must be able to buy out the owner.

You have to plan at least within a year or two prior to your expected retirement or departure from the business, “how exactly are we going to accomplish that?”. You cannot just show up one day and say, “Hey I want you to buy me out and let’s go ahead and do it now,” If there has been no planning, or if they do not have the financial wherewithal to make that happen, such an approach is not an option.  Decide on that destination, and the earlier you decide, the easier it will be to get to that objective.

 

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