Succession planning in a small business can be a complex matter. Often the business might not attract external buyers or might be somehow unsuitable for sale. One option to consider is selling the business to current employees. This can be done in one transaction or as a process.
The business owner will be selling the business to people he or she trusts, and the employees are the people who know the business best, providing continuity for clients. Often the retiring business owner can make a slow exit; reducing working hours or stepping into a consultancy or supportive role (both before and after the buyout occurs).
A management buyout can be a slow process, sometimes beginning at recruitment stage. If a person is recruited with the intention that they will take over the business, or an existing employee has been given this option, it can lead to increased business success where the employee is personally invested in the outcomes.
A management buyout can be funded in several ways, such as through share bonuses, staggered acquisition, borrowed capital, personal finances, or if the business holds sufficient funds a redemption of shares. It can be gradual process wherein the management take on more responsibility and ownership over time, or it can be an instant changeover when all the pieces line up. How the deal work will depend on the structure of the business as well as the intentions and wishes of the parties.
Succession planning for any business should be well planned and well researched to take advantage of tax incentives, to ensure that proposals are realistic, and to ensure the longevity of the company and security for the employees.
The buyer will likely know the business very well but will still need to do due diligence on the company financials and risks. They will also need to be prepared to step into the responsibilities of ownership and being an entrepreneur, which can require a very different set of skills to those of a manager.
The success of a management buyout will involve both parties taking legal, financial, and tax advice early, repairing any gaps, and working collaboratively towards an agreed timeline.
The above is provided for information purposes and is not intended as legal advice. We, at Fitzsimons Redmond LLP, act for both buyers and sellers of businesses. We would be happy to talk to you about your intended sale or purchase, or advise you on your options. Please contact us on 01-676 3257.
By Lisa Quinn O’Flaherty
Partner at Fitzsimons Redmond LLP