In cases where no family member is interested in taking over your business or if you do not have a potential successor in your family, there are two options for non-family succession:
- Buy-sell option – selling your share of the business to other owners
- Management buyout – selling your business to employees
For a business that is a partnership, the buy-sell agreement is available to them. How the remaining partner(s) will purchase your share of the business when you die, become disabled or retire can be determined by buy-sell agreements.
These are the items that are explained in buy-sell agreement, a legally binding contract:
- When owners can divest their shares
- Parties that can buy the owner’s shares
- How much is the value of the owner’s shares
- Where the financing will be obtained to pay for the owner’s shares
Insurance will be a crucial part of any buy-sell agreement as your co-owners may have insufficient funds to purchase your interest in the business, and the business will need to be liquid to maintain its operations after you turn over ownership.
Management buyout, or selling the business to managers or employees is a common succession strategy for small and medium-sized businesses. However, there are both advantages and disadvantages with a management buyout:
- Both the old and new owners will have some assurance of the business’ future.
- Employees already have the knowledge about the business’ strengths, weaknesses and culture.
- There is already an established relationship with suppliers and customers.
- Employees may feel more assured that their jobs are secured. When selling in an open market, outside buyers may have a mind to replace employees with their own.
- Owning an interest in the business can strengthen productivity, innovation and morale. This is brought about by the shift in mindset from employee to owner.
- New owners will be more committed to making a success of the business as profits will go to them.
- There is no need to sell or reveal classified information to a rival in business.
- Training may be needed for the management buyout.
- A dispute may arise over the purchase price.
- The financing should meet the requirements of the seller but also have enough remaining to keep the business in operation. Major problems can arise if a buyout leaves no cash after the sale.
- Managers may only be interested in the buyout to continue having a job. They may not have the funds or knowledge to run the business in the long term.
- If the buyout fails, you have to cautiously handle relationships between you and the staff.
This process must be handled over time and communicated in a straightforward manner. Have professional advisers on hand to help management with each step of the process.
Seek guidance when undertaking a management buyout of your business. PJS Accountants provide a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs. Contact PJS Accountants for enquiries.