Succession Challenges-Who pays?

Many years ago I had the opportunity to work with a privately held firm that was giving considerable thought to ownership transition.  As a good size firm, the financial implications of shifting ownership from one group to another weighed heavily on the minds of those who were helping set the strategy for the transition.  Fiscal issues are always a front-burner consideration during succession planning and they sometimes trump the people part of the process.  Finding a good method to transition is of key importance.  Our firm focuses solely on the people aspects of the succession strategy, but we have partners we can call upon who have great expertise on the fiscal side.

Let me give a simplistic view of the fiscal side:

Company A has 5 owners with the following ownership stakes-

  • employee 1 owns 30%
  • employee 2 owns 20%
  • employee 3 owns 20%
  • employee 4 owns 15%
  • employee 5 owns 15%

This is a very simple model, but for the sake of round numbers let’s set the value of the firm at $10 million.  Using the data above, the succession strategy needs to set a process to transfer that $10 million from those five individuals to others over a given time.  I will not get into the various methods to do this, but even if you are the most engaged, interested party who is about to assume ownership, finding a way to fund that amount is a little daunting and it typically needs to take place over a 5 or 10 year period, even longer.

Considering the financial side of this, it is of little surprise to see how some may balk at taking on the responsibility for purchasing the ownership of those who have come before them unless they have a very comfortable feeling about where the firm is currently and where it is going, giving strong consideration to the internal resources available and the external markets.

Here are a few sources you might look over if you want to learn more about the fiscal side of ownership transition and succession planning:

I could provide many other resources, but these will give you a good start if this is an issue that you are starting to consider.

Let us know how we can help.