Employee Buyouts- Better than you thought...

Today we have a guest blog from Chad Blevins:

Most business owners today have nearly all of their personal net worth locked up in their business, meaning that their retirement security is tied to their ability to sell the company. 

But when asked about their succession plans, most owners can’t articulate their plan to monetize their business value, they have been too busy running the business and surviving the economic turmoil. 

For those that have explored selling to an outside 3^rd party, a rude awakening if often waiting.  Most deals today come with a long list of “strings” that frequently include:

• Required long-term employment by the owner/sell (3-5 years).
• Relatively low initial down payment (40% is probably a good average right now). Significant “at risk” money in the form of an earn out.  If the business doesn’t perform, you might not get the rest of your money. 

There is an option that is often overlooked – your employees.  Many owners quickly dismiss the employee buyout option because they “don’t have any money”.   While that is certainly almost always true, is doesn’t mean that it isn’t a viable option.  And sometimes even the best option.

 

Done properly, employee buyouts can create some significant advantages over outside buyers.  First and foremost is the ability to create a true win-win.  As opposed to the adversarial negotiation process of a 3^rd party sale, a properly structured employee buyout can be based on “how can we best structure this for all of us to be successful”.  This takes advantage of the long-term relationships…and the long-term need for both parties to be successful.

What we often see as a result is significantly more financial creativity and flexibility – helping to minimize taxes.  Translated, the seller can NET more money from the deal, while the buyers actually pay less.  Everyone is happier and the deal is actually significantly less risky. 

And if money upfront is highly desired, there are reasonable financing options that exist where banks actually prefer to lend to someone with critical experience (i.e. a key employee).  It won’t get you all of the value upfront, but it can be a significant lump sum.

Consider a client of mine where we recently celebrated the 5-year anniversary of signing the deal to sell the business to the key employees.  When I initially met them nearly two years before that, Mike (the owner) felt certain he would have to do a controlled shut-down of the business.  It is a professional service business, with very little in the way of assets to either sell or borrow against.  Likewise, there wasn’t much of a market for 3^rd party buyers – and those that were interested wanted too much from Mike with too little reward.  Mike simply dismissed the employee option since “they had no money”.

We spent 2 years on this project, running parallel paths.  First was working out a financial structure that treated both sides fairly.  Second we had to develop and implement a strong training program to make sure the 3 key employees were ready to assume the leadership of the company (both internally and externally with clients). 

Five years later we are looking at having the deal paid in full by the end of this August, with the new owners ecstatic about their ongoing business.  Mike couldn’t be happier about the impact his company is now having on their three families, not to mention the rest of the employee base that didn’t see their jobs lost to the shut-down. 

And the even better news for Mike is that we structured the financials in a manner that allowed him to get an additional 25% NET from the deal that what would normally have occurred – making his retirement even more secure. 

There is no question that these employee buyouts create a longer-term mutual dependence.  Both sides need the buyers to run the business successful to be happy – at the very least for the years the buyers will be making payments.  As such, we are really careful to adhere to the following principles:

• Get started early.  Define deal parameters early on, even a few years before the actual deal.  It makes it real and tangible.
• Focus on the Transition Plan.  Craft and implement a plan to make the owner/seller obsolete to the company BEFORE the deal closes.  
•  Identify gaps in capabilities for the buyers and design a method to close those gaps – again before the deal closes. 
• Approach the design of the structure as a joint design.  Don’t have one side create an “offer” for the other side to consider.  This very quickly could spiral into a very negative negotiation process – risking your working relationship (and the stability of your company).

Finally, we advocate hiring an advisor to design the deal from the middle ground.  Representing neither buyer nor seller.  This dramatically increases the likelihood of a true win-win deal getting done. 

Questions to consider: 

1.  Do you have a true succession plan that you are working to – even if you are 10+ years away from selling?
2. Have you properly considered selling to key employees? 

a.     If so, how did the option look and what could make it better?

b.     If not…why not?  

CHAD BLEVINS

Chad Blevins founded Blevins Financial to serve the complex financial and estate planning needs of the closely-held business owner and high net worth individuals. His focus on combining an overall estate planning strategy with life insurance analysis positions him to serve clients in a more comprehensive -- and often more simple -- manner.

He has held executive leadership positions in Fortune 500 companies (GE, Honeywell, MagneTek), private start-ups as well as family-held businesses. His experience includes executive positions in Sales, Marketing, Business Development, Finance, Operations and M&A work. This diversity of experience allows him to work in a highly comprehensive manner in dealing with client’s personal and business objectives.

Chad is a Board of Directors member for the Northwest Family Business Advisors, which focuses on teaching advisors how to work together for the client’s benefit.  His level of expertise and desire to educate has also prompted speaking engagements with the following organizations:

Washington State CPA Association Association of General Contractors (AGC)

National Electrical Contractors Association (NECA) Approach Management Systems/Smart Association Northwest Family Business Advisors.

Chad was a recent honoree by the Puget Sound Business Journal as one of the “40 Under 40" top business people in the Puget Sound area, recognizing his contributions to both the business and charitable communities.

Chad is married, has two children and is active with various charities serving those with Autism and other disabilities. He holds an MBA in Finance and Marketing from Indiana University and has undergraduate degrees in Business Administration and Economics. Chad enjoys skiing, golfing and is an active coach for local Little League teams.

Institutional Amnesia: What Happens When You Can’t Remember the Past

Today we have a guest blog from Dan Weedin:

As baby boomers start the process of exiting the business stage, they take with them a tremendous amount of institutional knowledge and smarts. Are you prepared to preserve your past so you don’t destroy your future?

I recently worked with a client who told me that over the next five years, 86% of their workforce would be eligible to retire. This is a startling number and caused this organization to pause. We worked on creating a leadership development program that systematically transfers experience-based knowledge through a professionally based mentoring model. Regardless of the size, scope, or industry of your business, you will benefit from instituting a thoughtful, intentional mentoring model in your business.

Otherwise, you may end up suffering from institutional amnesia. Consider these points…

• Employees leave due to retiring, finding a new job, or dismissal. They have knowledge that’s valuable – operations, technology, human resources, sales, and administrative. What’s that worth?
• You may have set up protections for sharing vital information and proprietary property. What you may not have thought of are shortcuts, efficiencies, contacts, and operational processes attained over the course of years that improves productivity and saves valuable time.
•  Without gleaning organizational “secrets of success,” you’re bound to actually “break” what might be a smooth running machine. How long does that take to fix?
• Preserving institutional memory is a business strategy that most businesses haven’t considered, but will be a huge topic in the future. Who is better capable of teaching than those valued employees who made your success possible? You will find that they are more valuable as a teacher than potentially just playing out the string.

You have the opportunity to retain your memory with a few easy and painless steps…

• Institute a formal mentoring program. Train your veterans on how to show the young guns the ropes. Create joint accountabilities and engage all sides by showing them why it’s important to the organization and to them individually.
• Create redundancies for critical organizational information like passwords, client relationships, and crisis management. Businesses spend countless hours and money to design high tech redundancies for data. They spend less time establishing human redundancies that are caused by illness, injury, termination, retirement, or any other loss of services. Why would you leave your most valuable asset – the smarts inside your employees’’ heads – to chance?
• Avoid gravitational pull. On the road to any desired future state there lies many speed bumps and traps. I call it gravitational pull. It’s easy to go back to that place when time and patience are short; money is tight; or supervisors stop holding employees accountable. This final step is the most critical point.

Bottom line – if you have employees who hold institutional knowledge, then you are in danger of getting amnesia. The results of institutional amnesia include institutional death. The scary thing is it may be happening and you don’t know it until it’s too late.

What have you done to avoid being hit with “amnesia?” What are you prepared to do to retain your institutional “smarts?”

© 2012 Dan Weedin. All Rights Reserved

DAN WEEDIN

Dan Weedin helps turn his clients business risk into rewards. He is able to take the abstract concepts of risk and crisis management to help business owners prepare and respond more effectively and with less time and cost to crisis. Since he doesn’t work for an insurance company or agency, he is able to act as an unbiased advocate for his clients. You can lear ore about Dan and how he can help your business on his web site at www.DanWeedin.com.