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The Gift With Strings (not the good kind)

I have decided it’s time I step away from my business, and I want to sell it to my employees.” Linda (not her real name) invited me to her plush office to discuss her retirement plan and to show me the awards her professional services company had won over the years. It was impressive, but I was more impressed when she started telling me about her side business, real estate investment.

In 2004, Linda and her husband started buying homes in their neighborhood near Vanderbilt in Nashville. “It was by no means a glorious business,” she said, “I’ve had all the problems you’d expect renting to college kids. But a funny thing started happening about eight years ago.” Living in Nashville, I knew exactly where this conversation was going, as she continued, “As Nashville started to grow, my neighborhood became ground zero for gentrification, and it didn’t take long for our property values to explode. Richard and I now have way more investable assets than we need to fund a good retirement. Honestly, I just don’t need to get much, if anything, from the sale of my business.

Linda has a full time staff of 18, most of whom have worked in the company for more than five years. There are three department heads on whom she has heavily relied over the years. So our first discussion was whether to sell to the full employee team or just the top three managers.

We then talked about valuation. “I have paid my staff well, but none of them have the resources to buy my company,” she said. So I asked Linda the obvious question, “If you know they don’t have resources to buy the company, how does selling to them make sense?” Then she said something I seldom hear. “Like I said, I don’t care if I don’t make money from the sale of the business, I’m just ready to move on and leave it in good hands.

Our discussion then moved from selling the business to giving it away. She was surprised that something as simple as a gift might not be as easy as she thought. Over the next 45 minutes or so, we identified three problems that need to be resolved for the gift transfer to be functional. First, she would have to decide how to handle the bank line of credit which has her personal guarantee. Second, she would have to decide how to handle potential legal liability from a customer lawsuit that is still in process. Finally, she would have to decide how much working capital to leave in the business, which might even include her needing to fund more working capital to assure a smooth transition.

As our discussion was winding up, Linda said, “I never thought giving something away would have so many moving parts,” she said. “I might have to rethink my entire strategy.”

Giving someone something for free is normally easy, but not when that “gift” carries liability or the potential for liability. Linda thought she had an easy transition plan, but like most business owners, she is finding that the transition from her business will take time and careful planning.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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