Over the years transitioning businesses to key employees has gotten a soiled reputation resulting in many exiting Founders not considering this as an option. Often an internal transition will meet the Founder’s financial and personal objectives better than a sale to a third party.
The negatives that lead to the poor reputation are often myths that can be dispelled with adequate planning. Consider the following:
|Key employees need to have financial resources sufficient to pay for ownership.||Using appropriate financing, the Founder can receive most, if not all, of the purchase price prior to exit.|
|Key employees do not have the skills or temperament necessary to keep the business profitable.||Proper planning results in focused training and coaching for the key employee.|
|No choice but to carry a post-transition note which is risky.||Not carrying a substantial note transfers business risk to new ownership upon exit.|
|Since the key employee will be paying the purchase price with future profits, the founder might as well turn management over to key employees and keep the ownership, enabling a harvest of future profits.||All buyers pay the purchase price with future profits of the acquired company. They may pay the price to a bank or to an investor, but the price is always paid using future profits of the business.|
Ruling out an internal transition inadvertently rules out the possible advantages which may include:
- Greater employee loyalty
- Enhancement of the founder’s legacy
- Continuity of business systems
- Greater control over the transition process
- Increased purchase price
- No earnout
There are as many ways to structure a transition as there are exiting Founders. Make sure that the process that you use to evaluate your options and construct your transaction considers ALL options, including internal and external transition. This will ensure that you make informed decisions resulting in your objectives being met and you having peace of mind. You might be surprised when the best option for you is an internal transition!