Some business owners consider an exit strategy that involves hiring a CEO to run the business while they step into a passive ownership role. Others might look to sell the business on a long-term note to a key employee with minimal upfront investment. At first glance, these options may seem appealing—saving on broker fees and keeping the transition simple. However, these approaches are often more complex and risky than anticipated.
One of the biggest challenges is ensuring the long-term commitment of a CEO or key manager if they lack substantial financial investment in the company. When the business goes through tough times, what motivates the CEO to stick with the business? Unlike an owner with “skin in the game,” a hired leader may lack the same level of dedication, making it difficult to count on their commitment when business or economic conditions become challenging.
Some owners are drawn to selling to a key employee out of loyalty and wanting to preserve the key employee's job, especially if that employee has been instrumental to the company’s success. While this sentiment is understandable, even a sale to an external buyer usually involves retention of key employees. Buyers typically know that maintaining skilled staff is crucial to the business’ success, and they are unlikely to make changes that risk losing essential team members.
And what happens if you promise to sell the business to a key employee and the process becomes contentious and not only does the key employee not acquire the business, but also quits, and now you are left with marketing a business to external buyers with a vacancy in a primary management position? Even if you are able to quickly hire a replacement, buyers will have trepidation about continued good performance when the business has recently undergone turnover in a key management position.
At Codiligent, we believe that most often working with a skilled business broker or investment banker to market the business and find an external, financially qualified buyer offers greater financial returns and lower risks—even after broker fees and tax implications—compared to selling to an insider. A quality broker or investment banker not only markets the business but also carefully screens and negotiates with buyers, which can lead to a more secure and rewarding sale.
Benjamin Graham, mentor to Warren Buffett and author of The Intelligent Investor, offered timeless applicable advice:
“Do not let anyone else run your business, unless (1) you can supervise his performance with adequate care and comprehension or (2) you have unusually strong reasons for placing implicit confidence in his integrity and ability. For the investor, this rule should determine the conditions under which he will permit someone else to decide what is done with his money.”
In short, when planning your exit, consider both the financial and operational risks of a passive ownership or insider sale. A structured, professionally guided sale to an external buyer may ultimately provide greater peace of mind and financial security.
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