Is a management buyout right for you?

Business owners who are thinking about retirement or changing careers may be considering a management or key employee buy-out of the business. It can be a great idea in the right circumstances, but as with all major financial decisions, you need to get all the facts first and think it over carefully. If you're wondering whether this would be a good idea for you, check out this article by Western Business Brokers called Is a management buyout right for you?

Also, check out my book called Succession Planning Kit for Canadian Business.

Key employees are important in management buy-out

There is one huge benefit to selling your business to key employees or managers, and that is the continuity of the business. If you sell to current management or employees, this means that the people who run the business day-to-day (with the exception of you) will still be there after the sale, as will their experience, skills and customer relationships. Other than replacing you, the business will not have to hire and train new people to do most of the current work.

Just as importantly, the relationships that managers have built over the years with important customers and suppliers will be able to continue on without interruption. This continuity will go a long way to avoid that business interruption gap in which new workers have to learn their jobs, and customers and suppliers have to adjust to new people and new ways of doing things.

Of course, this kind of success depends on having the right people in place. You have to pick your successor carefully, as not everyone is capable of running a business even if they are enthusiastic and interested in buying your business. You have to be sure that they have the necessary skills and aptitudes.

Management or employee buy-outs often involve the owner selling the business and then being paid back over a number of years from the profits of the business. Given that fact, you will be relying on these employees or managers to run a profitable business so that you can be paid back as agreed. In o ther words, you will have a strong interest in the continuing financial stability of the company after you have left it.

Business succession doesn't just mean leaving your business to your children

When we hear the phrase "succession planning", many of us think of royal princes and princesses in succession for the throne now held by their parents. So when we think of "business succession planning", many people automatically assume this means planning to pass your business down to your children.

Passing the business on to your kids is certainly an option for some people, but there are plenty of other ways of passing on your business that have nothing to do with your children. The words "business succession planning" refer to any planned way for a business owner to exit his or her business, when the business owner sells the business, retires or passes away.

If you are thinking about how you might one day sell or transfer your business to someone else, some options you might consider are:

- Selling the business to a group of managers or key employees at your business, known as a management buyout. This might involve your being paid for your shares in the business over time from the future profits of the business.

- Estate freeze, in which your business is reorganized to transfer ownership to someone else and your payment is secured by preferred shares in the business which are redeemed over time on an agreed-upon schedule. This is often done for the purpose of limiting your tax liability.

- Selling the business on the open market. You can decide whether you want to sell the whole thing as a going concern, in which you sell not only the assets of the company but the corporate shares as well. As an alternative, you could sell only the assets of the business (or some of them) and keep the shares of the business for yourself.

- Rolling your shares of a farm or fishing operation over to someone in the next generation. This doesn't have to be your child; it can be (among others) a step-child, son-in-law or daughter-in-law, grandchild or greatgrandchild. The fact that this transaction is a "rollover" means that no tax is payable at the time the farm changes hands from you to your successor, as the transaction is tax-deferred.

Deciding how to sell or transfer your business is not always an easy decision. The right choice will depend on how much time you have, the economic outlook for your business, whether or not you have an appropriate successor within your family, whether you plan to fund your retirement through the sale of the business, and many other factors. You should invest some time and energy into finding out what is available to you. Make sure you talk to an accountant and/or a lawyer before starting the transaction to make sure that you understand the tax and legal implications of what you are about to do.

My new book, called "Succession Planning Kit for Canadian Business" talks about all of these options and more in detail. I also talk about using an interim manager, developing your successor to take over, family dynamics, shareholders agreements, sources of funding and much more. I also explain how to make sure that your personal planning and your business planning work together.

The book also includes worksheets to develop your succession plan. The book is due to be available on October 1, but you can pre-order it now at Chaptersonline at http://www.chapters.indigo.ca