Follow Dallas Linkedin
Email Dallas Email
Business Growth
Jun 1, 2019

Maintaining Control, Minimizing Risk, and Rewarding Your Best Employees

Sponsored Content provided by Dallas Romanowski - Managing Partner, Cornerstone Business Advisors

For many small-to-mid-market business owners, there are few things more important than maintaining control of the company, minimizing risks for the company, and rewarding the employees that make the company successful. Ownership transfers to the company’s most valuable employees can do all of these things with proper planning, but there is a caveat.

While it’s admirable for owners to try to reward their key employees with ownership, many owners want to do everything they can to receive maximum value during the process of transferring their ownership interest. In many ownership transfers to employees, the owner’s successors can’t afford to pay the owner for their shares upfront. Instead, they often buy their shares of ownership using a promissory note and then use their subsequent share of the company’s cash flow to pay the owner (paying off the note over time).

But many owners know from experience that company cash flow cannot be predicted with certainty and may fluctuate. How can owners transfer to employees while protecting themselves against cash flow fluctuations? Consider the story of an owner who experienced this.

Rhonda Flint owned a 65-person building-materials supply company that specialized in high-end stone fabrication. After 33 years of growing the company, she decided that she was ready to start transitioning out of her business. She wanted to transfer the business to her four key employees: Glen, David, Marge, and Mary.

Rhonda was confident in her management team taking over, but she was also cautious. During the Great Recession, her company’s cash flow had bottomed out for several years. She had managed to guide her management team through the lean years, but the company’s survival relied on Rhonda’s intuitive talents, something the management team wouldn’t have once she left. Even though Rhonda had installed safeguards that strengthened the business and made it attractive to outside buyers (she had received several offers from strategic buyers), her goal was to keep the business in the hands of people she trusted.

With this in mind, Rhonda spoke with an advisor who had experience in business transitions named Susan. Rhonda wanted to know how she could transfer ownership to her management team without having to perpetually babysit during the toughest times.

“My hope is that I can give each of them a 25% stake. I still like the work I do, but I want to dial it back and retire within the next 10 years or so,” Rhonda said. “I know that none of them can pay me for their stakes upfront, but I don’t want to just give them ownership and hope for the best. They’re all excellent workers, but they fell a little short when things got really rough. What can I do?”

“Are you sure that all of them are interested in ownership?” Susan asked.

“Positive,” Rhonda replied. “We’ve been talking about this for quite some time. I’m just not sure how to go through with it.”
 
“It’s good that you confirmed that they all want ownership,” Susan began. “What we can do is rather than simply giving your employees ownership, we can give them the opportunity to buy it from you over time instead of having you accept four promissory notes for larger sums that make you uncomfortable.”


“And how would that work?” Rhonda asked.

“We’d give your employees specific cash flow targets to hit every year. If they hit those yearly targets, we’ll give them a chance to each buy a limited portion of your ownership and all the perks that come with it, other than voting stock, which they’ll get once you’re entirely out,” Susan explained. “And since you’re still motivated to work for about 10 years, you can stay onboard and guide the company as much as is necessary, delegating your most important responsibilities slowly over time as your management team matures. We’ll put all of this in a written plan so that everyone is working off of the same page.”

“I didn’t know I could do that,” Rhonda said. “I thought I had to give them ownership all at once.”

Rhonda and her advisors crafted a plan that would allow her key employees to buy pieces of ownership only if they met her specific cash flow targets. Motivated by this plan, her key employees exceeded her targets in each of the next five years, with minimal help from Rhonda. The increased cash flow allowed the key employees to buy the remainder of Rhonda’s ownership in Year Seven using a bank loan. In the end, Rhonda was made whole and her key employees took over leadership and operations entirely.

Properly planned ownership transfers to employees can be a great vehicle to keep you in control of your business, minimize risks, acknowledge your employees, and still reach your financial goals. Please contact us today if you’ve ever wondered about how you can eventually transfer out of your business on your terms.

© Copyright 2019 Business Enterprise Institute, Inc. All Rights Reserved

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420 or email [email protected]

Other Posts from Dallas Romanowski

Bizjournalblockad
Ico insights

INSIGHTS

SPONSORS' CONTENT
Untitleddesign2 9202334730

New Scotts Hill Medical Center to be a One-Stop Destination for Many Health Care Needs

Novant Health - New Hanover Regional Medical Center Novant Health
Chris 16239425

‘Creative,’ An Adjective To Describe Your Accountant?!

Chris Capone - Capone & Associates
Cfss headshots parker robert webversion 21422121214

The Latest Solar Scams and What You Can Do to Help Stop Them

Robert Parker - Cape Fear Solar Systems

Trending News

EPA Makes $3B National Announcement At Port Of Wilmington

Audrey Elsberry - Feb 28, 2024

OsteoStrong Opens On College Road In Wilmington

Emma Dill - Feb 28, 2024

Patricia Kusek Resigns From Endowment Board

Audrey Elsberry - Mar 1, 2024

Polyhose To Double The Size Of Its Wilmington-area Facility

Emma Dill - Feb 29, 2024

Report Finds Economic, Environmental Impact Of N.C. Railroads

Audrey Elsberry - Feb 29, 2024

In The Current Issue

Fallout From Natural Disasters, Pandemic Puts Strain On Insurance Companies, Consumers

New arrivals to the North Carolina coast are often pleased with the amount of house they can buy here from the proceeds of their home in lar...


Born To Create Affordable Housing

The competition is stiff, and the work is hard, but Stephanie Norris wouldn’t give up her job for anything....


Book On Business

The 2024 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2023 Power Breakfast: Major Developments