Planner: Sell to your management team

Here are some ideas and talking points to help you connect the planning dots with your clients. There are three Planners in this series, each outlining different ways a business owner client could transition out of a leadership role and move a company to new ownership.

Sometimes, a group of employees or managers will offer to buy your business. Although both parties have a sense for what the firm is worth, an owner should take a more formal approach and hire an outside advisor to set the value.

Pros

• Proven ability. If you’re considering a sale to your management group, they’ve likely shown they can run the business profitably.
• Privacy. Not shopping the business publicly means you don’t have to reveal confidential information to potential buyers.
• Stakeholder comfort. There’s no fear of a new person coming in and cutting costs, firing people, or closing or moving operations.
• Speed. You don’t have to do the dog-and-pony show, because they players have seen your financials. Plus, you’re only dealing with one party.
• Price. You’ll get more money up-front than selling to family members.
• It’s an arm’s-length transaction. Whatever you negotiate generally stands the test of fair market value with Revenue Canada.
• You can stay involved. You transition out on a pre-determined schedule. This lets you secure $2 million or $3 million for your retirement and continue to work in the business if you want to.

Cons

• You may not get top dollar. Owners usually offer existing employees a break on the price, so this route can eliminate the possibility of finding a buyer who’ll pay a premium.
• You often retain risk. Managers tend to cobble together financing from a variety of sources, including their own cash, bank financing, or other lenders. And a portion of the purchase price is usually in the form of vendor financing to be paid out over time with interest. Request a letter of confirmation from the lender assuring initial funds will be available by the time the deal closes; take as much security against company assets as possible; and ask for personal guarantees from the employees.
• Not a clean break. The issue of when you leave remains up in the air, because you still have money in the company. That can be a bit of a problem on both sides, so establish parameters in an employment contract (time frame, roles, and responsibilities), as well as a transition date.