So you want to exit your business. You’ve worked hard for many years and you want a change. Maybe you want a change of pace, or to take a rest, or maybe you want to look at another venture using the cash from the sale to finance it. Whatever the reason you want to exit, you want to do so profitably, with as few problems as possible.
Maybe you have an employee on staff who has talked to you about taking a shareholding, and you agree that they could do really well at heading up the business. And certainly many small business owners have exited their business by gradually selling off shares to an existing staff member. It sure sounds like a smooth transition and a great arrangement for your customers. As far as they are concerned it will be business as usual. Many small business owners have exited their business successfully in this manner with a good result for both parties.
However as you consider the scenarios you will face you may find that there can be a number of challenges that need to be addressed. In this article I look at three potential fishhooks and conclude with an exciting alternative exit approach.
Fishhook 1. You lose control of the company before you have all your money out.
Once you have transferred half your shares, you no longer have full control over your company, nor the bank account. You are left hoping that the company will continue to perform until such time as you have exited fully. No problems if your staff member is competent. But you have no guarantees that a situation might arise that affects the business’s ability to pay you the balance of the purchase price. Should this happen, there is little recourse, since the purchase was negotiated as a gradual sale of shares. If the shares have little or no value then you are left with less that you hoped for. You may even be persuaded to purchase back your staff members shares and build your business again.
So in a gradual movement of shares you want to ensure that once you become a minor shareholder your purchaser has the ability to complete the sale.
Fishhook 2. If you retain shares, how will dividends be calculated?
If you agree to sell a majority of shares and remain as a minor shareholder, then you will want your share to continue to yield dividend on an annual basis. However, you may have no control over how the owner sets his salary, nor how much is reinvested in the company and so you have no real control over how much profit is declared in any year. Many small businesses operate on a very casual basis in this area and it is not alway easy to track expenses and profits accurately. Your arrangement might begin well, but as time progresses your new owner may find ways to reduce the amount you are paid as a minor shareholder. This is especially true if you have little continuing contact.
So if it is the intention that you retain shares and gain annual dividends, then you need to sort a rock solid agreement on how your dividends will be protected.
Fishhook 3. You may need to train your staff member in running a business
You staff member may be great at his job, but does s/he really know what it is like to carry the burden of a small business? If you started the business, or if you have owned it for some time, then you have become used to the pressures. But simply because your staff member understands how to function in your business, does not mean they have what it takes to work on the business. You may be left “holding their hand” as you train them in becoming a competent business owner. It’s great if they master this quickly, but becomes a problem if you discover “after the event” that they simply don’t have what it takes.
So in any staff purchase, make sure that your staff member has had some exposure to the pressures of business ownership.
The alternative exit option - Agglomeration
What if, rather than go through all the uncertainties of selling to a staff member, you could simply trade the shares in your private company for shares in a big publicly listed company (PLC)? What if you could still keep full control of your business - and benefit from all future increases in company profit? And what if doing so were to only take a matter of weeks with no upfront fees?
In the alternative exit option you do not lose control. You remain as CEO after it is sold and you continue to retain full control - of the company and how to make best use of the resources the PLC brings to your company. You get to make all the strategic decisions about your company. Further you get all the benefits of being part of a global PLC - collegiality with some of the brightest entrepreneurs in your industry and outlets into markets you never thought possible. Moreover, you get to trade future increases in earnings for more shares in the PLC.
Should you wish to “sell” your business to an employee you can promote them to your role as CEO and offer, as an incentive, shares in a PLC based on the increase in performance that they achieve. Moreover, their involvement with the other entrepreneurs in the PLC will give them excellent protection and training as they grow into their role.
Then you can sell your shares or retain them and earn dividends.
Agglomeration of your company is a not too different to simply selling your company. However, it is more than likely to yield you a much better sale price and bring way less stress. The thing is, because an agglomerated PLC usually has no debt, is directed by entrepreneurs and makes substantial profits they are highly sought after by investors.
You can find out more at www.agglomeratebiz.com
Agglomerate Your Business brings together three leading New Zealand business coaches who believe that entrepreneurs are the change makers in the world and that there are 'millions' of good small businesses run by entrepreneurs that deserve to have a level playing field with the big boys.