Avoid Financial Disaster when Selling Your Company

Hovey with Tennille Bank front

Is selling your company going to reward you financially or leave you with a bankrupt company and debts that you cannot repay?

Thus far your entrepreneurial enterprises have gone well. You started a company, made it a success, ran it for decades and now would like to cash out to move on onto something else. You have solicited offers and some have been received. How to you evaluate which one to accept? A range of options are offered. These include:

  • Cash Purchase with A One-Time Payment
  • An Initial Payment with More Being Made over A Period Of Years
  • No Initial Payment with You Awarded Stock in the New Company

These are three end points that might include more incentives such as continuing health insurance, your receiving retirement benefits along with your cash settlement, housing, a consulting contract, salary during a transition period of months, hunting rights on company owned properties, etc. These sweeteners are significant, and it is easy to get carried away with them while overlooking possible downsides to the deal.

Cash Out Your Company

Advantages of a Cash Out settlement center around the fact that when the deal is done, it is done. Although there might be some perks allowed along with this type of settlement, once you have sold your company you are out of it except for a brief transition period. Your settlement is fixed, and typically after a few months you are free to do whatever you wish. If you are a young guy, you might want to start another company. Whatever, you have your money, and any connection with the company you started is over. It may be hard to let go, but you need to make a clean break, financially, socially and psychologically. It’s all over. Move on to the next stage of your life.

With this type of settlement those buying your company are taking more risks, and the amount being offered might be half, or perhaps only a third, of what you consider that the company is worth. Their giving you cash is taking away money that might otherwise go into improving the company’s physical plant, bringing in a new accounting system or other upgrades to make the company more viable in the present business climate. All too often, these changes also include shifting production facilities to less expensive operating sites in another state or even out of the country. These changes are going to be financed by debt, and your demand for cash increases the buyer’s debt load without any associated improvements to the company. Consequently, many potential buyers will attempt to draw out these payments over a period of years with the ultimate objective of paying you from operational profits. This transfers more of the risks to you.

A Part Cash Part Later Payments

This type of settlement has a longer pay-out period and a larger total settlement which might be made even more attractive because the tax obligations would be less on the total amount. You would pay less to Uncle Sam and be allowed to keep more for yourself and your family. You are betting that the new management team will be able to take your company, run it as least as well as you did and perhaps make it more profitable that it was. They certainly think so, and they will do everything possible to make you believe that this is true. In reality it may not be.  They may have no intention of operating your company, but after selling off its assets, leave it as a shell organization that is unable to function, much less make any money. The company is taken over, its assets sold, debts incurred and goes to bankruptcy with you left out altogether. Their obligation to you now becomes noting more that their obligations to other laid-off employees, which is next to nothing, Except for the initial payments, you will likely receive nothing further, and creditors might even go after your assets if you are still listed as a company officer.

Stock in The New Company

In order to preserve a maximum amount of cash to foster the operation of the new company, the buyers may offer you a minority stock position with a seat on the board. Being a board member is somewhat attractive because it keeps you, the former owner, involved; but does not have nearly the time commitment that you had as owner. You would still have some input as to the direction the new owners were taking the company, but your obligation has changed. You are no longer representing yourself, but you are representing shareholders. The shareholders interests are not yours, and the less paid to you, the more money is available for reinvestment in the company or as dividends to them.

Even if you violently disagree with what the majority owners wish to do with your former company, you are helpless to do anything about it but go along and hope for the best. Again, unwise investments, unnecessary spending for trips and advertising, expansion of the product line without doing sufficient market research, inflated salaries for company officers and outright theft can quickly drain the assets of any once-thriving company. All you can do is watch.

The final result is that you now hold worthless stock, the company goes bankrupt, and you are left with nothing. Maybe you want to put your workers back to work and start up the company again, but you are now likely facing a debt load that you cannot repay.  You make a heroic effort, but it fails. Whatever assets you had in the company are now sold off, and you are left with nothing to show for a lifetime’s work.

This unfortunate chain of events is happening every day to companies large and small. Before you sell your company, know your potential buyers and select your options carefully. My general advice would be to take a smaller settlement as a cash buy-out and then separate yourself from your old company as fast as possible. A continued association may offer some social benefits; but unless they offer some financial benefits as well, such commitments are more of a drain on your time and finances than an enhancement.

It took time and care to grow your company, use equal care in divesting from it.

This is but one of the many issues that I discuss in my most recent business book, “Create Your Own Job Security: Plan to Start Your Own Business at Midlife. I also have a YouTube video on this topic on the Hovey Smith Channel. The book may be purchased from Amazon and other on-line booksellers. If you wish to consult with me on this and other business topics contact me using the reply box below.

Create Your Own Job Security

Generally available for special promotion price of $10.99.

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