Article


Recruit Your Successor?
Look inside or outside to sell your company
By Donald Feldman
Date Published: 1/1/2016

 

(Editor’s note: Back in May of last year, Don Feldman spoke to so many of you with this tactical piece. Succession pressures are tense and will build this year. Following Don’s advice might be your best resolution for 2016)

Does the prospect of putting your business on the market give you the willies? Having prospective buyers wade through the intimate details of your business operations not for you? Then you have probably given some thought to selling your business to insiders. This is a popular exit route with a 2011 survey by the Business Enterprise Institute finding that 41% of owners would like to sell to key employees. However, not all of these owners succeed.

There are 2 major potential problems with sales to employees—they don’t have the financial resources to buy and they don’t have the leadership skills to run the business. In the right circumstances, employee buyers might be able to obtain bank financing. They typically need to demonstrate the ability to manage the business and acquire a small equity stake—through some creative structures such as a stock bonus or a purchase of a heavily discounted minority interest—before approaching a lender. Small Business Administration guarantees are available for loans up to about $5 million and banks will lend on good terms with these guarantees in place.

But what if after a careful assessment you determine that your key employee(s) don’t have the leadership skills to keep the business on track? Note the precondition “careful assessment.” In my experience, business owners frequently assume that their employees can run the business. They tend to assume that employees have the same entrepreneurial spirit and passion to succeed that they have. Business owners, among other virtues, tend to be an exceptionally generous group. They recognize that key employees have helped them make the business successful and want to reciprocate by giving these persons the chance to run the business. But to their surprise, after a “careful assessment” owners are sometimes forced to conclude that key employees are not the right persons to sustain their business legacy.

Sometimes after reaching such a conclusion, and still not willing to go the route of a sale to an outsider they’ll say, “why don’t I try to find someone who can replace me as CEO?” But when leadership and ownership reside in the same person(s), this is a challenge.

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