Exit Option Four: Sell to Co-Owners

In our ongoing blog series about Exit Options, were discussing the advantages and disadvantages of the eight Exit Options available to each business owner. In our fictional business, Front Range Powder Coating, we have a senior owner (Ben) who wishes to exit the business and two junior owners (Tom and Larry) who want to retain ownership and/or interest after Ben departs. Each of the three partners has valid opinions and concerns that will impact one another.

An owner like Ben who examines a sale to a co-owner (or multiple co-owners) might find the list of advantages and disadvantages nearly identical to those on the lists for a transfer to family member or key employees.

The advantages to a sale to co-owners are:

  • Buyers whose commitment, skills and knowledge are known to departing owner
  • Perpetuates the company’s mission or culture
  • With planning, the departing owner can remain involved in the company

And the disadvantages of the sale to a co-owner are:

  • The departing owner is not generally cashed out at closing
  • The owner might experience ongoing financial risk
  • Owner involvement may need to continue post-closing and
  • The departing owner typically receives less than full fair market value. (Not surprisingly, that prospect holds little appeal for Ben, our fictional owner)

A number of planning concepts that take time to implement (usually three to ten years) may well allow Ben to reap his full share of the fair market value of the company and do so with less risk. For example, this buyout can be designed so that Ben sells no voting stock until he receives the entire purchase price.

As is always the case, smart planning undertaken well in advance of the transfer can minimize the effect of these disadvantages. Schedule your FREE consultation with Covenant Consulting Group to learn more about your exit route options.