Mergers and Acquisitions

Team Ownership Transfer

Internal Sale

Selling your business to your leadership team.

Given the value your leadership team adds to your business, and their importance to its future success, you may wonder if there is a way to continue to empower them while transitioning out of the business.  An internal ownership transfer may achieve both of these goals at once. It is an exit strategy that allows you to depart while retaining and incentivizing your most valuable asset – your leadership team.

The greatest and most successful organizations are those that develop and empower their leaders.

Why? Because the leadership team is a gathering of the best talent in your organization, it is where combined experience and knowledge meets strategic planning. It’s the ‘engine room’ of every business – from it, winning strategies can be devised and business success will be achieved.

Selling your business to your team.

Let’s talk in more detail about transitioning ownership to your management team – or an internal sale.  If this intention is outlined ahead of time, you will be set-up to dynamically move leadership from you to a successor. As with all transitions this process mustn’t be rushed, following the steps outlined in your exit roadmap will make the transition as smooth as possible.

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What

Simply put, this is a way one, or more, of your leaders can acquire the business from you. To get more technical, these are types of management buyouts.

The reasons for choosing an internal ownership transfer are personal – specific to your goals and vision for the future. While some ownership transfers happen through a manager or managerial team approaching the owner, it is most often an owner-driven decision.

After an owner shares their intention to transfer ownership to the team, a price is agreed and the business’s stocks or assets are purchased by one or more members of the management team.  The individual or team may use a combination of personal savings, debt or, as is often the case, the company’s future cash flow.

Most often management teams will not have the cash on hand to purchase the business outright.  However, there are many ways to finance such a transition. Destined guides its clients through the process of evaluating the different ways to finance an ownership transfer to find the solution that meets both the owner and manager’s needs.

Why

You may choose an internal sale to honor personal values, growth aspirations, or both.

Many think financial gain is the primary reason an owner sells their business.

But with an internal ownership transition money isn’t usually the primary motivating factor. Mainly because some owners have accumulated wealth outside their business and an internal successor provides a level of continuity not possible with a third-party sale. In addition, seldom is there an internal successor with the disposable funds to buy the business immediately at a premium.

An internal sale can be designed for a fixed amount of cash to be paid over an agreed amount of time to the departing owner. The source of funds can include cash, loans, earnouts or collateral throughout the specified timeframe. Ultimately, an internal ownership transition will provide financial liquidity for your life’s work.

But what’s the benefit of selling your business internally versus an external sale?

You may prioritize the continuation of your heritage and legacy over maximizing financial gain.  And who better to honor your legacy in the future than your most trusted leaders.  You could also use an internal sale as a way to reward the team that has worked side by side with you to build your legacy. Or it may provide the opportunity for an immediate exit as the leadership team likely can carry on independently.

The desire for growth may also be a motivating factor.  You may realize that to scale the business the next generation will need to take the lead – a fresh perspective to explore new markets and channels.

Whatever your motivation, handing the reins over to your trusted people will ensure the longevity of your business legacy.

How To

The best way to execute a team transfer strategy is to develop a proposal for presentation to an individual or management team.

The individual or team will then need to decide if purchasing the business will be part of achieving their personal goals and vision for the future. Once the owner and team members decide it is the right fit, they will need to agree to the specific terms of the deal and the time-period for the planned transition.

The individual or team will want to do their form of due diligence in scoping a strategic plan for running the business, as well as explore any concerns they foresee with the transaction – such as previously unknown risks or liabilities. Also, during this due diligence stage, buyers will consult with their legal team, and transition advisors like Destined, to review specific analyses like a valuation, cash-flow, and any legal obligations.

Once the internal buyers have completed their strategic planning and due diligence on the business – not to mention are happy with the settled-upon transaction scope and funding – they’ll be in a position to move forward with the ownership transition agreement. The price and payment plan settled on will usually be pre-determined, in a formal legal document.

Once all parties are happy with the proposed value and agreed price, the internal sale can be finalized.

Once the sale is final the official transition of responsibilities can begin. The goal is for the management of the business to be fully transitioned to the new ownership team by the end of the transition time frame. This includes all critical operations so there will be no risk of finding ‘skeletons in the closet’.

How taxing is this transfer journey?

If you are considering selling to your team you can explore several ways to transfer ownership and the tax implications of each.

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Full or Partial Sale

Selling your business, as an asset, to your successor, may require a gains tax.

Stock Buy Back

You may be able to utilize a stock buy-back program and thus pay fewer capital gains.

Employee Stock Ownership Plan

If you would like to reward your entire organization with ownership, while motivating them for future success, an E.S.O.P. may be a good fit while providing tax savings.

Team Transfer

Achieve a successful ownership transfer.

Your management team are those you’ve identified to best represent your company, who embrace the vision for your business. Not only have you implicitly trusted them with what’s been your livelihood and passion project, but you can revel in the fact that with their acumen, your business will reach new heights.

Contact Chris Andersen to discuss how we can help you transition ownership to your team.

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