A lot of business owners ask me about selling to their children who are involved in the business, or to their management team that helped them grow the company. Many times, these will be owners who aren’t ready to think about leaving the company. Sometimes they want to make sure their child or their chosen successor will be successful and think they need to stay in control while that transition is in process. Some would really like to see the company continue to exist beyond their retirement. Selling to insiders or family can give the owner(s) who is selling a longer time frame to maintain majority control while providing a way to monetize some of their assets in the company.

There are two questions I have for business owners who want to sell to insiders:

  1. Do the people you want to sell to want to buy and run the company on the terms you are planning? Imagine how surprised some owners are to find out their vision for the future is not a match with the people they want to sell to.
  2. Have you accumulated enough money/financial resources outside of the business to support your desired lifestyle for the rest of your life?

The sale to insiders will usually not be the highest value the owner could realize from the sale of the company. (Generally, the highest value will be achieved when the company is sold to a strategic buyer who is competing to buy the company.) However, we know many companies are not going to be successful in achieving a sale for their desired price and terms to a third party due to some factors that may even be beyond their control (small or declining market, small revenues, gross profit margins not at industry standard, etc.)

There are several ways a transaction like this can be structured including selling stock, gifting stock, a stock redemption plan, or a combination of these to fit a particular set of goals. If the company is financially healthy and the management team or family managers are energized and capable of driving the company to success, the right plan can be a tremendous opportunity and motivator for the buyers. Note the importance of the client getting tax, accounting, and legal advice for structuring the plan to the company’s best advantage from those perspectives. We usually work as part of a team of trusted advisors in developing these plans.

SELLING OR GIFTING STOCK

In these cases, the owner will sell or gift shares to the family or management buyers over a period of years while maintaining the controlling interest in the ownership. At the end of the initial period, the majority interest would be purchased by the minority shareholders. Note that the tax impact of the sale or gifting of shares should be planned with your tax advisor to minimize any unnecessary tax effects to the seller (and buyers).

STOCK REDEMPTION

In a stock redemption, the company will buy the shares of one or more shareholders. The remaining shareholders end up with an increased ownership percentage. In this type of plan, a loan may be made by the company to purchase the shares and the debt is held by the company. The interest expense is reported as a deductible expense on the company’s tax return. Since the company is being used for collateral, it is generally easier for the company to acquire the loan that it would be for individuals wishing to make the purchase.

In general, the owner who is selling will have the benefit of remaining in control while he/she is in the process of turning over control of the business. There is risk that the business performance may decline in the years while the owner is being bought out, even after he has sold a majority interest and is still expecting some payments. There is less risk if the company were sold outright to a third party, but there is also the corresponding loss of control upon closing.

What’s the first step? Start the discussion about your options with a trusted adviser who has worked with clients to arrange these types of plans and will collaborate with the right professionals. Sometimes an “orienting” conversation can be helpful in establishing which path(s) you want to explore.

If you would like to discuss your exit plans including selling to insiders, the value of your business, selling your business or buying another business, let’s chat. It’s rarely too early to think about setting goals. Have you bought a business and are having trouble integrating it? We can help with that too.

I can be reached anytime via email: [email protected] or phone at: 224-688-8838.

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Alison Hoffman

has more than 25 years of experience in strategy, operations, mergers and acquisitions and delivering business-to-business client solutions. Her areas of expertise include managing operations for profitable growth, organizational design and strategy activation. She brings a wealth of experience through her work in evaluating, valuing and purchasing over 30 companies, leading company-wide cultural and business integration projects and consolidating best practices among business processes and corresponding computing systems. Read Full Bio

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