IS IT POSSIBLE TO ACHIEVE LIQUIDITY AND LEGACY?

Many entrepreneurs and business owners find themselves at a crossroads as they near retirement and/or contemplate selling their business. How can they transition in a way that allows them to reap reasonable economic rewards for the years of hard work and sweat equity they invested, while at the same time finding new ownership that maintains a commitment to their founding mission and principles?

The conventional routes may be the most well-trod, but they may not be for everyone. Indeed, many business owners are actually unaware that alternatives even exist. In this post we cover the key questions owners must answer when contemplating a sale of their business, why the conventional options may not be for everyone, and propose an alternative - steward ownership - that all mission-driven owners should consider.

The Conventional Route

Typically, conventional business transitions take one of three general forms:

1. Sale to an Internal Party (management buyout or Employee Stock Ownership Plan)

2. Sale to an External Party (financial or strategic buyer)

3. Transfer to a Related Party (family member)

To understand which option is the best fit or most likely outcome for their company, owners often focus on three key areas of consideration: Leadership & Governance, Company Dynamics and Liquidity & Financing.

Leadership & Governance

• How deep is my leadership bench? Are they prepared to take the reins if I retire? Do I trust that they will run the company with the same values?

• What incentives need to be in place to ensure that we can attract, retain and reward leaders to sustain the company? How do I ensure the next generation continues to focus on and steward the mission and those things that have made this company special (valued relationships, suppliers, employees and/or ways of operating)?

• How involved do I want to be after the business transition? Would I consider an advisory role or board seat?

• How much power should new owners and investors have? Should other stakeholders be involved in decision making?

• How do I ensure the company stays on track with the legacy/mission I want to continue on? Are there protections I can build in?

Company Dynamics

• What is our competitive positioning?

• How strong are our operating fundamentals?

• What is our vision for growth?

• What economic or industry trends are impacting my company?

Liquidity & Financing

• How much is my business worth?

• What do I need personally from the sale/transfer of my business? When do I need it?

• What are the estate planning and tax implications of a sale or transfer to me and to the company?

• What financing will my company need to be successful in the coming years, what flexibility will be needed, where will those resources come from?

• What is my company’s capacity to take on and/or payback debt or equity? What terms or returns could the company commit to that would be reasonable/healthy and allow us to continue to invest in what matters?

• How do I ensure that new investors are as committed to the values as I am and will protect the company over the long-term?

After answering these questions, some business owners may discover that a conventional business transition doesn’t feel like the right fit.

• Perhaps they are looking for an ownership solution that is relationship-oriented, not transaction oriented, to ensure the next owner(s) shares their passion for protection of the mission.

• Perhaps they want to achieve distributed power in the new ownership form which includes other stakeholders (e.g. key leaders and/or staff), not just shareholders.

• Perhaps they may want to ensure that decisions aren’t made with a short-term perspective, driven only by profit considerations.

• Or they may simply be drawn to the idea of stable, organic growth in the future, or prioritizing certain commitments through growth (e.g. staying local, sustainable production practices) rather than growth at all costs.

For owners whose primary drivers are ensuring their mission and founding purpose is carried forward and that the company’s independence is preserved, a steward ownership transition may be the best solution.

The Steward Ownership Route

Steward ownership is a proven alternative to conventional ownership that permanently secures a company’s mission and independence in its legal DNA. Often structured as trust-owned companies or hybrid structures, steward owned companies embed two principles:

1. Profits Serve Purpose

For steward-owned companies, profits are a means to an end, not an end in and of themselves. Profits generated by the company are either reinvested in the business, used to repay investors, shared with stakeholders, or donated to charity.

2. Self-governance

For-profit businesses are often beholden to the interests of shareholders who aren’t involved in the operation or management of the business. Steward ownership structures keep control with the people who are actively engaged in or connected to the business. Voting shares can only be held by stewards, i.e., people in or close to the business, and the business itself can never be sold.¹

¹ Purpose Foundation (2018) - Steward-Ownership: Rethinking Ownership in the 21st Century

Getting Started

Whether you’re thinking about selling all or part of your business, transferring it to a family member or employees, or transitioning to steward ownership, it’s important to give yourself plenty of runway to make well-informed decisions. After all, how and to whom you transition your business to is possibly the most important decision you’ll make – for your personal financial situation and the legacy you leave behind.

So where to begin? Start with these four steps:

1. Assemble your transition team

You’re going to need a group of trusted advisors to help guide you through the process. There will be professionals who can help you understand your income/liquidity needs for retirement, and how to minimize your taxes and efficiently transfer wealth. You will likely need legal advisors and bankers to structure your deal, and advisors on steward ownership design. We recommend that you identify one key advisor/project manager to play a leading role in coordinating the overall process; this allows each advisor to focus on their area of expertise, while ensuring the process moves forward efficiently.

2. Assess your company’s financial viability for a steward ownership transition

Not every company is a good fit for steward ownership from a financial perspective. Similar to a conventional business transaction, it’s critical to have robust projections in place to understand the business's cash flow and ability to service any debt/equity taken on to finance the transition. We recommend that you also do extensive modeling and contingency planning to understand outcomes under best-case and worst-case scenarios.

3. Design your steward ownership and governance structure

With conventional business transitions, the focus is generally on who will assume ownership. With steward ownership, the focus shifts to how the ownership and governance is structured after the transition. This requires a decision-making framework that balances the “head” (business strategy, competitive environment and financial needs) with the “heart” (mission, vision, culture and leadership principles).

4. Create your transition roadmap and implement your plan

A detailed roadmap will ensure you stay on-track as you navigate your transition. It acts as the project management template for your internal team as well as your external advisor(s) to keep the process moving forward with the appropriate level of input and oversight.