Why business owners should consider an Inside Exit
Over the past couple of decades, the Vermont Employee Ownership Center has been partnering with business advisors to present workshops, webinars, and seminars on the topic of selling a business via an inside, or internal, exit path. As we will again on Thursday, Sept. 19, we’ve teamed up with the Small Business Development Center many times to help us reach small businesses with these presentations. These businesses (defined as having fewer than 500 employees) make up 99% of all companies in Vermont and employ roughly 156,000 workers, over 60% of all employees in the state. They also provide immeasurable social value to our state, creating the local jobs that our economy is built upon while keeping the powers of decision-making close to the people most impacted by those decisions.
Small businesses also face a great challenge in finding a good exit strategy. Nationally, most small business owners report not knowing the available exit options despite their desire to make a transition plan. Among those who try to sell, the majority of owners fail while those who succeed often express deep regrets about the sale soon after. Complicating matters further, around half of business owners end up in the situation of being forced to exit earlier than planned due to unforeseen circumstances. All of this points to a great need to help business owners identify their goals and options, prepare their businesses for sale, and find the right buyers.
As is true throughout the US, this need has gone largely unmet in Vermont. Reports from the Small Business Administration show that although the number of Vermont small businesses without employees is up by 17.5% since 2000, the number of small businesses that have at least one employee has decreased by nearly 10% in that time. These reports show that the numbers of small businesses with employees have decreased or remained relatively stagnant across most industries in Vermont while certain industries have simultaneously seen rising numbers of nonemployer small businesses. While some or many of these new nonemployer businesses may someday become employers, the current trend reflects a net loss of small employers even in the recent past.
An inside exit
Faced with the extensive need for succession planning support plus the decline in small employers across industries, more people are recognizing the promise of internal exit paths that hand ownership over to individuals who are near to both the company and its community of employees, customers, and suppliers. For many business owners, transitioning ownership to family members, one or more key managers, or the full group of employees is the surest, if not the only, way to leave their company in capable and trustworthy hands. When taking on ownership, these individuals set out already having a stake in maintaining the valued relationships and community roots surrounding the business. They are also likely to be more equipped than anyone to understand the business culture and values that need to be preserved and how to apply them as the company naturally evolves and enters a new chapter.
Of course, not all family members or managers or employees would make an ideal fit as owners. Even when a selling owner has an idea of who they think should own the business next, those people may have other plans for their future. It’s best to stay flexible enough to explore multiple outcomes if needed and start early enough to train up the new leaders who will carry the business forward. Having a clear set of values and goals to guide the transition process is also essential.
A sale to employees
If a sale to family members or key managers maintains proximity between those who own the business and those who most interact with it, a sale to the full group of employees narrows the gap even further. No matter the model of employee ownership used, those who labor for the business become those who most directly benefit from its success, leaving no room for outside interests to compromise the health or longevity of the business. As a group with deep knowledge of business operations, employees can be ideal stewards of the company’s culture and practices. On the whole, they are firmly rooted in both the business and its surrounding community and have a meaningful stake in helping the business grow where it’s been planted.
An Inside Exit: Selling a Business to Family, Managers, or Employees
We are partnering with the VtSBDC for a webinar exploring succession paths tomorrow, September 19, from 12-1:30pm EST. This free webinar will include discussion on how to prepare for an ownership and management transition as well as what to consider in a sale to family, managers, or employees. This webinar will be led by Sergio Alvares from the VtSBDC with an overview of employee ownership succession options by VEOC’s Matt Cropp. The presentation will include time for a Q&A.
