By Josh Patrick
AdviceIQ.
After dedicating a good 20 years to building your own business, the question just might be, “What now?” When selling the enterprise you nurtured, getting your managers to buy is usually your best bet.
I spend lots of time talking to owners of private companies who are not sure how to leave their business. If you consider selling your company, you might find that it isn’t going to get you the cash you thought.
In the wealth management business, the selling owner usually gets 35 percent to 40 percent in cash and holds paper for the rest.
How would you like to have 60 percent of your wealth depend on how well your buyer runs your old business? If it doesn’t do well, then what happens? The buyer stops paying you. What do you do then? To me, selling your company for some cash to an outsider is a bad idea. There is just too much risk in doing this sort of transaction.
What can you do to make it safer? If you’re going to play bank, you might as well play bank with people you know well, such as the managers in your company. You probably get a little less down, but the business transfer is likely to be more successful. Client and vendor loyalty remains. You can also structure a tax-friendly sale more easily with your own people.
The real trick here is to start early. You can’t make this work if you decide that you want your managers to take over in the next six months. It takes years to get used to the idea of an ownership change. You need lots of time to make sure they know how to run your company successfully.
You start letting go of control of the business by leaving for a couple of weeks (and do not call in at all.) You then have some idea of how your company does after you leave. Before you do the deal, hopefully, you should spend at least six weeks away, and everything’s fine when you return.
When you sell your business, tell the buyers you are the one who’s taking the biggest chance. Make sure you have the risk conversation with your managers early in the process. They probably aren’t going to have enough money to write you a big check, so make sure you get proper security agreements to protect your loan.
That might mean your managers give you a personal guarantee, allow you to control the board of directors and put their homes up as collateral. If you get serious push back from one manager, you have to move on to find another who agrees to your terms.
Plan ahead in choosing and testing your management team. If done properly, an internal transaction is often the most satisfying way to sell your business.
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ABOUT THE WRITER
Josh Patrick is a founding principal of Stage 2 Planning Partners in South Burlington, Vt. He writes for AdviceIQ, which delivers quality personal finance articles by both financial advisors and AdviceIQ editors.
