Non-family succession

If you don't have any likely successors in your family, or your family is not interested in taking over your business, you have 2 options for non-family succession:

  • sell your business to employees ­through a management buyout
  • sell your share of the business to other owners through a buy-sell agreement.

Management buyout

A common succession strategy for small and medium business owners is a management buyout — selling your business to managers or loyal employees. Management buyouts have both advantages and disadvantages:

Advantages

  • Both you and the new owners will have some certainty about the future of the business.
  • People already involved in the business are in the best position to understand its strengths, weaknesses and culture.
  • Relationships with suppliers and customers are already established.
  • Employees may feel more secure in their jobs. In open market sales, external buyers may be tempted to replace staff with their own.
  • Having a stake in the business can improve productivity, innovation and morale. This stems from a change in mindset from employee to owner.
  • New owners will be motivated to make the business successful as they will receive the profits.
  • You do not need to sell or disclose confidential information to a competitor.

Disadvantages

  • Management team may need training or coaching.
  • There may be disagreements over the purchase price.
  • The financing must meet the seller's needs and also leave enough working capital in the business. A buyout that leaves no cash after the sale can create major problems.
  • Managers may be keen to buyout a business to save their jobs. Do they have the funds or experience to run the business in the future?
  • If the buyout doesn't proceed, you must carefully manage relationships between yourself and managers or staff.

This process needs to be managed over time and openly communicated. Always work with professional advisers to help management through each stage of the transaction.

Buy-sell agreement

If your business is a partnership, you may have a buy-sell agreement in place. Buy-sell agreements determine how the remaining partner(s) will buyout your share of the business in the event of your death, long-term disability or retirement.

Buy-sell agreements are legally binding contracts that explain:

  • when owners can sell their interest
  • who can buy an owner's interest
  • how much an owner's interest is worth
  • where funding will come from to pay for an owner's interest.

Because your partners may not have enough funds to buy out your share of the business, and any liquidity in the business will be required to keep it operating after you leave, insurance will be a key part of any buy-sell agreement.

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