I promised you some thought starters for those of you who want to get out of your business: retirement, diversification, bored, for whatever reason. Hopefully you read my previous post around selling to an outsider adn turning the business over to family members. Now the final post in this series – selling the company to your employees. Things to think about (and this is by no means an exhaustive list, just the tip of the iceberg as thoughts go):
- An ESOP(Employee Stock Ownership Plan) is a common option for transferring ownership to your employees. But it is not intended to make you rich in the process, since this is primarily an employee benefit in which shares are tranferred to employees in various ways, but mostly without them paying for it. So if you don't need the money, and you have a good team in place, this could be a great way to ensure the company continues in good hands other than yours.
- The ESOP must get its shares from the company to enable it to give them to employees, which means it either gets shares as a gift from your company or it borrows money from somewhere – like a bank – to buy those shares from your company. In the latter case your company will be the entity likely required to pay off the loan. So profitability and positive cash flow are key.
- Alternatively you could arrange a management buyout (MBO) in which your in-place management team acquires the company, perhaps with their own cash, with the help of outside investors, or by borrowing from a bank. This last option will likely again have the company repaying the loan; so again profitability and positive cash flow are needed to make it work. At least in this option you can get paid for your ownership, either up front or over time.
- About that 'over time' thing, if the MBO will be paying you over time, you'd better make sure that the people running the show are able to make it succeed, or your retirement fund could once more be in jeopardy.
Hopefully this series has been helpful and it will help you retire with ease and comfort. Or at least I hope it will convince you to start planning now, not when you're actually too tired to continue. Think ahead and you'll be ahead.
As always, I welcome your comments and feedback.
