How to Prepare Your Key Employees to Take Over Your Business

It is well known that only 20% of small businesses that go to market sell, and the Silver Tsunami, that giant wave of baby boomer business owners who want to retire, makes the problem worse. Most of these businesses won’t sell, and they will be shut down.

Who is hurt if the company shuts down?

• The business owner can’t access most of their net worth.

• The employees are out of a job.

• The community loses a major asset.

Does the business need to be shut down? Consider this: The company has customers, revenues, trained staff, systems, channels of distribution and an infrastructure and ecosystem that it took years to develop. It’s a shame to throw all that away!

The traditional outside buyers are strategic buyers, financial buyers and lifestyle buyers. If there aren’t enough buyers on the outside, what about looking on the inside?

Related: Why an Increasing Number of Retiring Entrepreneurs Are Selling the Business to Their Employees

Advantages of employee ownership

Business owner:

In addition to gaining access to most of their net worth, business owners gain control of the sales process. They do not have to meet and greet several potential buyers.

When dealing with outside buyers, they read and analyze letters of intent from those who are interested, choose one and then struggle with an intense due diligence process led by the potential buyer‘s financial advisors. The whole sales process is much simpler when selling to key employees.

Key employees:

Key employees experience a major upgrade in their careers.

Other employees:

Other employees retain their jobs, and their “second family” remains intact.

Community:

The money that flows through the company remains in the community. That money helps support education, fire and police departments, road maintenance, etc. Also, suppliers, service workers and trusted advisors retain a client.

Additional benefits:

The chemistry between buyer and seller is established. Many times, a deal goes south between the seller and a stranger due to a lack of chemistry.

The culture of the company remains the same. If a stranger buys the company, the culture will change in some fashion. If these cultural changes are too intense, many key employees may leave.

Related: How to Transition to Employee Ownership

Training your key employees

Key employees know the company inside and out. They know the customers, the product and the systems, and the other employees like and respect them.

However, there are functions that a good CEO performs, and the key employees are usually not involved, so they would need training. What are these functions?

Strategic planning:

This includes training in innovative growth strategies, planning in response to the competition and navigating changes in the market and the industry.

Cash flow:

It is imperative that the owner understands and implements cash flow management and forecasting.

HR management:

The owner should have a sense for evaluating the talent that is needed to perform specific tasks in the business. They also need to know when an employee is adversely affecting the company and what to do about it.

Mindset training:

The key employees will need to adjust their mindset from that of an employee to that of an owner. When they talk with the company’s trusted advisors, they will need to have their owner hats on.

Types of employee ownership

• Employee Stock Ownership Plan (ESOP): This is far and away the most popular form of employee ownership.

• Employee Ownership Trusts (EOTs): EOTs are intended to support employee ownership of companies and are becoming more common.

• Worker Cooperative: A business owned and controlled by its workers.

All three of these types of employee ownership can work well with larger companies. They are complicated and very costly. They cost tens of thousands of dollars to set up and thousands to administer on a monthly basis.

There are companies that specialize in setting up and administering the different types of employee ownership. Most require an EBITDA of $1 million or more before they even consider a company as a client.

But what about the smaller companies that would like to consider employees in their succession plan?

Selling the company to the key employees would not be a government-sponsored program. The deal would only include the business owner and the key employee(s). The owner would choose the key employees and their positions within the company going forward.

Related: Selling Your Business to Your Employees

Selecting key employees and moving forward

The business owner should be very selective and careful in choosing their employees to own the company. They should have a good credit rating and be properly motivated to learn what is needed to be a business owner.

You, as the business owner, should approach each key employee selected as a potential owner and, in passing, mention the possibility. After you have talked to each key employee individually, analyze their reactions in preparation to meet with them collectively. If they are interested, then you follow up with the process.

The first thing you need to know is what your business is worth right now. You need to have a market valuation done. This will tell you how your company compares to similar companies in the same industry.

Then, develop a plan to make the company effective, efficient and ready for scaling. Choose one key employee to be president while you remain the CEO, and train the president in all the functions listed above. The other key employees will be assigned management positions.

When the company has grown and the cash flow is sufficient to support increased debt, create a plan to sell the company to the key employees.