The Good News and Bad News of Selling Your Business in a Post-Corona World.
Get your FREE copy of Jim's new white paper today: DOWNLOAD

The Importance of Accountability When Selling to Key Employees

Rob and Randy have a successful 22-year business relationship. While they are not ready for retirement, they have asked me to help them plan to sell their professional services business in four to six years.

Instead of selling their business in the open market where they’d likely be bought by a competitor, Rob and Randy want to sell to their three key employees. However, those employees don’t have the financial strength to buy the business, even assuming they could get a bank loan for part of the deal value. This means Rob and Randy will have to be paid over several years, which introduces obvious risk. What if the business fails because the three employees can’t work together? What if they can’t keep the current client base?

There are lots of ways the deal could go south after the sale. Rob and Randy, therefore, want to craft an employee transition plan that doesn’t leave them with too much risk. Fortunately, they have time, so I suggested they begin to offload some of the business decisions to these three employees to see if/how they can work together. To do this, Rob and Randy will create an executive committee with these three employees and begin to bring them into every decision the business has to make. By the end of 12 to 18 months, Rob and Randy will have a good idea of how the three employees work together. If that construct is as productive as hoped, Rob and Randy will then begin to pull back from client development.

Over the course of two to four years, Rob and Randy will have a clear sense of whether these three employees can run the company together. If so, there will be less risk for them taking payment over time from their three key employees.

Of course, a plan like this works only if the owner has the advantage of time to prepare. Moreover, the owner has to be genuinely committed to offloading decision-making and client development (in other words, stepping away from the day-to-day functions of the business). Remember, any plan for any purpose is only as good as its execution and time to see it come to fruition. Rob and Randy have asked me to meet with their newly formed executive committee each quarter to hold everyone accountable to the plan. It’s not that the plan needs me, per se, but the plan needs some third party with the confidence and credibility to ask the hard questions that keep the parties focused on the objective.  I’ll tell you in a few years if this plan works.

 

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 story, names and fact patterns are changed to preserve the parties’ identities.

 

The following two tabs change content below.

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.

Latest posts by Tennessee Valley Group (see all)