The Conversion Process: Overview
Selling your business to your employees can be an intimidating process. ICA’s approach is to provide simple straightforward tools designed to minimize costs, yet ensure that the interests of all parties are addressed. Every business is unique, and so are the objectives of the owners who wish to sell their business. Having assisted firms of all sizes convert to employee ownership, ICA is one of the foremost firms designing employee ownership for small businesses. We have been instrumental in transactions in a variety of industries and companies ranging in value from less than $1 million to more than $20 million in value. There are five basic steps to transferring your business to your employees. We’ll walk you through each of them. Download: Ensuring Your Legacy.
The first step in any conversion process is for an ICA staff member to consult with the interested seller to identify the objectives of selling the firm, how much control the selling owner is interested in transferring to employees, what proportion of the firm they are interested in selling, and the speed at which the transaction should take place. Once we have outlined the objectives and reached an agreement, the conversion process begins. This initial consultation usually takes 30 minutes to an hour and there is no cost or obligation. If you’re a business owner interested in selling part or all of your business to your employees, contact the ICA Group today.
Questions addressed in the initial consultation.
- Why are you interested in selling the company to your employees?
- What is the current capital structure of the firm?
- How much do you think the business is worth?
- How strong is your management team?
- If there are other owners, what is their interest in employee ownership?
- What do you view a democratic workplace to be?
- How quickly are you looking to sell the business?
- Will you remain working or are you looking to exit?
Having established a set of objectives and identified a range of alternatives to be evaluated, the process turns to developing a financial model that tests the feasibility of the options that have been developed. This involves reworking the historical and projected financials to look as though the new firm was already operating it – for instance, paying a manager rather than a draw of the income, or fully allocating the personal costs. We also project the future performance of the company and the future value of the firm, taking into account any previous evaluations. Each option is then evaluated in terms of its impact on the sellers; the purchasers of stock (the employees); and the long term viability of the company. Additionally, we initiate preliminary discussions with financing sources to test the likely feasibility of obtaining financing for the options being evaluated.
Once we have discussed the options with the sellers and the management team the team decides on an option to pursue, and then we present a short report outlining the proposed option, including financial projections, the likely impact on current, future shareholders.
Structure The Transaction
Once you have determined that employee ownership is right for your company, we work with you to structure the deal to meet the needs of both the owners and employees. This involves determining the value of your firm, exploring the financing possibilities, adapting ICA Model By-Laws to fit your business and making sure all the key stakeholders understand the process.
While ICA’s conversion approach is designed to minimize or even eliminate the need for outside counsel or tax advice, it is during this process that your outside advisers are brought up to speed so they understand what’s happening. Many companies engage an independent third party to determine the value of the firm and we can help you work through this process to ensure everyone’s needs and concerns are addressed.
Execute the Deal
With a deal that everyone involved is happy with, you can now complete the transaction. The new company will have to hold its first annual meeting to elect the officers (who are usually chosen during the structuring process), approve the by-laws, and sign the sales document to buy the company, certain assets and assume certain liabilities. If the current owner is staying on, they often remain the President and Chair of the Board. The new company will legally exist at this point and can open a bank account and the employees can become owners. The final step in the transaction is signing and swapping all the paperwork, when that is complete the new firm is in business. This step requires drawing up financing documents, share purchase agreements, and the purchase and sale agreement.
Operate as a Democratic Firm
With the transaction complete, you are now a democratically owned firm. While ownership is integral, the transaction is just the beginning of the process. ICA works with its clients to develop an effective and efficient governance system, train key staff and your accountant on any accounting issues, and works with your board to understand the financial issues that ensure all the owners own and can articulate your business strategy. We work with numerous community based partners and the Democracy at Work Institute to provide the best in class training for worker owners.
If you’re interested in learning more about how ICA can help you strengthen your business through employee ownership, contact us at (617) 232-8765 or firstname.lastname@example.org. The initial consultation can take as little as 30 minutes and there is no cost or obligation.