You might find this a comforting vision. Your loyal employees who have made a career of your business might deserve to buy your business. You might even have made a commitment to a manager that he would get the first opportunity to buy. You might have said you would work things out to make it happen.
But as you explore this succession scenario, do you feel a bit queasy? After all, it’s your business and your future at stake.
Although senior employees may seem to be your ideal successors, this plan isn't necessarily a breeze. Along with obvious benefits, come some real concerns.
First, the benefits of managers buying your business
1. know your company inside and out – maybe even better than you do
2. have earned your respect and trust over time – that’s why they have been there so long
3. will have time to learn how to take over the business
4. have an emotional connection to the business and may really care about the customers and staff
5. view your business as a career and have special knowledge of your niche
6. understand the opportunity and have had time to imagine how they will grow the business
7. appreciate and have skills to manage the risks involved
8. know and work well with customers, suppliers, employees, and lenders
9. keep you abreast of what’s happening in the business and allow you some control
10. make it easier for you to leave your business in stages
11. allow you time to assure that the deal works out and your business is secure
12. pay a higher sale price for the business, because they are paying for it out of the profits.
Now, some considerations
1. have less cash to invest in buying the business than a third party
2. use more of the company profits to pay for the business
3. need to use your money to pay you to buy your business
4. will drag out the buyout, so that you will continue to remain at risk during any downturn
5. tie you to your business for more years than you want
6. make it harder for you to withdraw support – it's easier to let an unfamiliar buyer sink or swim.
Help manager/buyers meet your expectations
Choose your manager/buyer wisely. Not everyone is suited to the role of owner-operator. If you have any doubts, get an objective assessment from a professional advisor on the suitability of the manager for this leadership role.
Start the training and transition period as early as possible. Provide coaching and mentoring yourself or hire a professional consultant. Make sure your proposed successor receives outside training from college classes, industry workshops, or community programs to strengthen any weak areas. Build leadership competence and confidence.
Use business sense and objectivity, not emotionalism, when structuring the deal. Selling to someone you have known and worked with for years is not like selling to a stranger. A deal that gradually gives control to the new owner can become murky, if the stages aren’t clearly marked.
Get professional help, including help from a CPA and a lawyer. Make sure you, your family, other employees, and your customers stay protected in the worst of circumstances. If the buyout process is protracted and your manager/buyer has not met milestones or handled decisions well, at what point will you still be able to fire him or her? What happens if you pass away during the deal? What happens, if your manager/buyer should die or become incapacitated during the process? Issues such as these should be addressed well ahead of time with expert advice.
A successful management buyout can be emotionally gratifying and financially beneficial for all. But without careful preparation, such a deal can sink. All you have worked for can go awash. With a well-considered succession plan, you can give your business - and a deserving, suitable employee - a chance for a great future. Plus, you will enjoy the financial rewards and the freedom you have earned.