How do you know if employee ownership is a good fit for your company? There are some basic measures that need to be met for successful transactions to take place – the company is must be worth owning in conjunction with both the owner and the employees want to complete the transaction. When thinking about selling your business to your employees consider the following:
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What are your relationships with your employees like?
The basic idea of democratic employee ownership is that the people who helped you build your company are in the best position to take it to the next level. You need to have decent relationships with your staff in order to make the transaction successful. How do you feel about letting employees elect the Board of Directors? How do you feel about sharing financial information and other participatory management practices? Do you think your employees have the skills and excitement to take leadership roles? You don’t need to have all these cultural elements in place before you transfer your business, but when it comes to employee ownership, it’s important that you trust your employees to be owners.
How strong is your management team?
Every business needs strong leadership, regardless of its ownership structure. Even if you plan on staying on after the transaction is complete, you need to identify whether the existing staff have the skills, technical expertise and relationships to make the business succeed. The best approach is to outline your current business operating procedures. This ensures that both you and key leadership understand how the business really works, who does what, and what skills are required to ensure the firm can succeed in the long term.
Are you willing to spend the time necessary to make the transaction successful?
While ICA’s business transfer approach is designed to simplify and streamline the process, thus minimizing the need for numerous outside consultants, the first step must be conducting a feasibility study to determine whether it is attainable. This requires compiling financial information and ensuring the new structure meets your objectives, all of which takes some time. Once the transaction is complete, you’ll also need to train the board and the new owners to ensure that your governance and management systems are effective. You should expect the process to take anywhere from 6 to 12 months.
Is the company profitable, with consistent positive net cash flow?
It’s not the case that an employee owned company has to make huge profits to work – many firms with thin margins are very successful co-ops or ESOPs. The reality, however, is that employee ownership often isn’t the best way to turn around a struggling company. If you’re using a leveraged buyout that pays off the selling owner with the firm’s cash flows, you need to ensure that the funds are there to build up workers equity. Furthermore, building an ownership culture takes time and energy – if the firm doesn’t have any room to breathe, it’s unlikely that you’ll have the resources necessary to build a thriving business. For information about ICA’s services for troubled companies, click here.
Are you only interested in maximizing your financial return?
There are numerous tax incentives for selling to your employees, and if you have a successful business it may be the case that you can realize a higher gain converting to a co-op than you would from selling to an outsider. If you’re mostly concerned with maximizing your financial return, however, democratic ownership may not be for you. Negotiating a sales price with your employees for the business you’ve poured so much of yourself into can be a delicate process and can cause strife if not handled properly. The best approach is to adhere to the principles that drive the top democratic management practices – honesty, transparency, and communication.