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July 2014
The Succession (and Exit) Planning Process: Part IV:
By Robert Norris

Planning for a Successful Sale to Insiders


This article deals with Step 4 of our firm’s six step planning process for helping business owners create an optimum succession plan for their business and exit plan which best meets their business and personal objectives.


Last month’s article focused on the keys to reducing the risks of an unsuccessful transfer of a business to “insiders” (family members, key employees and co-owners). This and the next article will present 10 specific elements to consider when planning for a successful sale to insiders, i.e., a sale which best meets the owner’s objectives and that keeps the owner in control until he/she is paid all or most of the sales price (in the event that the chosen successors do not have adequate funds to cash the owner out).


Element 1: Time. The first (and most important) question an owner should ask when considering a sale to insiders is, “Am I willing to take the time (typically 3 to 8 years) to execute and complete an insider transfer (while maintaining control)?” If the answer is no, then it is probably best to consider other alternatives such as a sale to an outside third party.


With the help of advisors trained in Exit Planning, who know how to design successful transfers to insiders (addressing the key factors in our previous discussion), creating the plan can take 60 to 90 days. However, the lion’s share of the time is spent implementing that transfer.


During this 3- to 8-year period, owners work with their management team to build the value of their companies, transition all management responsibilities to their management teams (so that the business not only survives the owner but thrives after the owner retires), and actually sell a substantial portion (or all) of the company to the insiders.


Element 2: Defined Owner’s Objectives. If owners are willing to devote the time necessary for this exit strategy, they also must define and quantify their objectives. These may include: Making sure they have chosen and properly trained the right successors able to profitably grow the company in the absence of the owner; Planning their (and their spouse’s) financial security and independence during their retirement; Choosing a date to begin retirement; Keeping the family legacy (or company culture) intact; Rewarding key employees; and/or Taking the business to the next level—on someone else’s dime. In a well-designed transfer plan, these objectives are met before control is transferred.


Element 3: Business Cash Flow. Healthy cash flow is critical to any sale. No buyer (insider or outsider) wants to buy a company with anemic cash flow. In a transfer to insiders, cash flow assumes gargantuan importance because initially it will be the major, if not sole, source of the owner’s sale proceeds.


Element 4: Growth in Business Value. Like healthy cash flow, buyers look (and pay top dollar) for companies that have the potential to grow in value. In transfers to insiders, only if cash flow continues to grow does the ownership transfer generally occur. For this reason, it is vitally important that owners contemplating an insider transfer install and evaluate Value Drivers before and during their exit transition. For a quick refresher on Value Drivers, please see our March 2014 article.


Element 5: Capable Management Desiring Ownership. Having a motivated management team in place and capable of replacing the owner seller is hugely valuable to any buyer. In a transfer to insiders, such management is essential. That management group must desire ownership and be willing to sign personally for any acquisition financing or ongoing company debt. Owners often assume that their management teams want to own their companies—and they do—but sometimes only until they realize that they have to pay for ownership (or at least guarantee company loans).


These successors to the owner must be respected by and followed by the other employees as successor leaders who not only are competent owners and managers but also are qualified to control all decisions regarding the future of the company. Once these successors are chosen by the owner, and in place and capable of replacing the owner, the owner should begin to delegate all responsibilities to them.


Next month’s article will address the remaining five elements which should be part of a business owner’s plan to successfully transfer his or her company to insiders.



Robert Norris is managing partner at Wishart, Norris, Henninger & Pittman, P.A.
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