With a recent survey by the Canadian Federation of Independent Business (CFIB) revealing that 76% of small business owners plan to leave their business within the next 10 years, the issue of succession planning is more crucial than ever[1] . Finding a suitable buyer ranks as the most significant obstacle to effective succession planning, according to the same survey, followed by the business valuation and the day-today operational involvement of the owner. One innovative yet often overlooked solution is selling the business to a long-term employee. This article aims to shed light on this alternative by exploring its mutual benefits, illustrating them with real-world case studies, and offering guidance on navigating common challenges.
The Mutual Benefits of Selling to a Long-Term Employee
Starting with mentorship in a business setting can sow the seeds of a future ownership transition. This mentorship establishes a win-win scenario; the mentee gains invaluable business insights, while the mentor, often the business owner, reaps the benefits of a more committed and productive employee. This kind of loyalty and mutual respect can be one of the most valuable assets a business has, especially when it’s time to consider selling.
The Benefits in Action: Succession Planning Through Mentorship
This mutual benefit is not just theoretical; it’s demonstrable in real-world scenarios. For instance, in the case of a fresh food market and a retail apparel store, both business owners utilized mentorship as a succession planning tool. They engaged us for business valuations, which played a pivotal role in transaction negotiations. The fresh food market owner began grooming one of his dedicated employees years before his planned exit, adding layers of value and stability to the business. Similarly, the retail apparel store owner took a proactive approach, empowering multiple employees with increasing responsibilities. In both instances, our valuation services set the stage for a fair and mutually beneficial transition, making the benefits of mentorship quantifiable.
—
Navigating the Waters: Potential Pitfalls and How to Avoid Them
Of course, it’s not all smooth sailing. Transitions like these come with their own sets of challenges, such as potential jealousy among staff or inflated expectations from the new owners. These pitfalls can erode the very value that mentorship and a smooth succession plan were intended to add. However, they’re not insurmountable. Business owners can take steps to manage these issues, such as promoting transparency in the transition process and seeking professional valuation services. Accurate valuation not only provides a fair transaction framework but also mitigates the risks of setting unrealistic expectations.
Final Thoughts: Long-Term Employees and Succession Planning
In a sea of change where 76% of small business owners anticipate exiting their businesses within a decade, planning for that transition is not just a luxury but a necessity. As finding a suitable buyer remains the foremost challenge, selling to a long-term employee emerges as a viable, mutually beneficial option. This strategy, especially when coupled with a strong mentorship program, allows for a smoother and more successful transition. Engaging the expertise of valuation professionals, like Troy Valuations, ensures that the transaction is fair and equitable for both parties involved. By focusing on this unique exit strategy, both business owners and their dedicated employees stand to gain, fostering a transition that is both financially and emotionally rewarding.
[1] Succession Tsunami: Preparing for a decade of small business transitions in Canada. Canadian Federation of Independent Business (CFIB). “Survey of Small Business Owners.” January 10, 2023. https://www.cfib-fcei.ca/en/research-economic-analysis/succession-tsunami-preparing-for-a-decade-of-small-business-transitions