Business owners often feel trauma about consideration of sale, partially due to a fear of what sort of future they may leave in wait for the loyal and industrious employees, who have helped them build the business to a successful state. This is a noble concern, and one which employees would appreciate immensely, if they only knew.
But many long years of experience in watching sellers, and charting the paths of their successfully sold enterprises, has taught us that – no offense to owners – you might be amazed at how much GOOD you can do for your best employees, with transition to new ownership!
One of the strongest protections an owner can provide for their employees is to SELL WELL. If you sell your company well, for competitive premium pricing, the new owners care tremendously about keeping your business team in place, and nurturing their continued growth to new heights. They will add professional financial and technical strengths that will make growth easier and provide a depth of support on a whole new, higher plateau than ever before.
Let me share just a couple of examples:
We sold a thermoformer some years ago, with just over $10 million in sales, and pretax profits of around $1.5M. The owner had a highly valued 2nd-in-command, who had been given 20% of the stock in the business, over a period of several years. When the owner sold the company, the buyer was adamant that this 2nd-in-command person continue. The buyer hired a new President, and left the 2nd-in-command in basically the same role.
The company sold for $9 million. 2nd-in-command got $1.8M of that sum. Additionally, the buyer put in place a bonus, which provided that if certain fairly modest targets were achieved of the coming 3 years, the 2nd-in-command would get another 10% interest. (The incoming President also got a 10% stake.) The new owners hired a very strong CFO for the company and a Director of QC – both much needed and very helpful. 5 years post sale, the new President exited, and 2nd-in-command became President, with another 10% stock incentive added. At about the 7 year mark sales for the company had grown to almost $30 million. Profits had risen from around 15% to around 22%. The company sold again, this time for $40 million. 2nd-in-command-turned President netted about $8M on this second sale. Interestingly, his own evolving new “2nd-in-command” entered into the new venture with incentives of his own, to gain ownership in the future.
On another occasion, we helped a group of employees with a buyout of their company, through an ESOP. As is common with an ESOP purchase, to obtain financing for the buyout, the bank required personal guarantees from a handful of top management. In a buyout of the company for $12 million, four individuals guaranteed the debt the ESOP borrowed, to pay off the exiting shareholder.
The new employee owners ran the operation with vastly increased care and diligence. They saved about $2 million a year, just by ceasing owner family benefits and perks. They invested HEAVILY in new technology. The company’s profits grew tremendously, and, probably even more importantly, their technical prowess and their unique capabilities skyrocketed. Five years after the ESOP buyout, we sold that company for $80 million – all cash! There were 200 very happy employees, with bigger retirement accounts than they ever would have dreamed possible!
So – maybe owners should be less fearful of “What will my poor employees do without me!” The next phase of company development may really let your people soar! Buyers who command large amounts of investable cash are generally very bright and very diligent businesspeople who will DO the necessary things to enhance resources, and support growth for an ongoing company. For the brightest and hardest-working employees, ownership transition can offer HUGE opportunity.