Succession Planning Series: Steps in a Workers Buyout

There were several challenges facing local businesses unearthed through last year’s Business Walks, and succession planning was chief among them.

Given that almost half of business owners planning to sell in the next five years have not prepared themselves with a succession plan and have no effective exit strategy that will assure the ongoing success of their business, it is an issue of significant concern. It’s also one where there’s a lot of confusion and a lack of knowledge as to the best route to take in leaving a business with the intention of seeing it continue to flourish.

It’s your business. Your blood, sweat and tears. How can you possibly let it go?

It’s hard to consider not being a part of the business in which you have invested so much. Fear is a huge factor in why business owners overlook a succession plan. Fear of retirement, fear of choosing an inadequate or ineffective successor and, simply, just fear of letting go.

The transfer of ownership of this wonderful entity you have developed and nurtured with great love and commitment is one highly charged with attachment and emotion. As a result, it’s easy to put off and ignore, until it’s on the doorstep and decisions have to be made quickly and often in a state of some panic such as when old age or illness make the succession immediately necessary.

In answer, and to help shed some light and provide some ideas, Imagine Kootenay is launching our Succession Planning Series to offer up strategies to get you thinking about the fate of your business long-term and perhaps provide a little guidance.


Steps in Workers Buyout: your employees may be the ones to continue to build on your business success

For whatever reason the outright sale of the business isn’t the answer. In many instances there may not be a clear line of succession, such as a family member, to ensure the long-term success of a business. Perhaps it’s time to consider letting go the reins to those working side by side, day to day, in the trenches with you: a workers buyout.

  1. Educating your workforce about the potential buyout. Your workers may include management as well as all of the hourly and salaried employees. For larger organizations with an organized workforce, the initial proponents may be employees protected by a union contract. The potential prospects must be educated about your intent.
  2. A buyout association must be established. Membership is typically offered to anyone considered potential future employee-owners. There must be leadership selected to identify and represent the interests of the buyout association. Through this leadership, the buyout association: a) Raises funds from members and solicits matching funds from government and other potential contributors; b) Contracts with and oversees the work of legal and financial consultants, and c) Develops a management team.
  3. Implement a pre-feasibility assessment. It’s a quick study by the development consultants identifying the key factors needed to ensure buyout success.
  4. The actual feasibility study. Professionally administered, this feasibility study gives an in-depth analysis of the economic viability of the organization/plant/company as an employee-owned co-operative.
    If this study identifies no feasibility in an employee-owned succession, it’s recommended the buyout association pull the plug.
    If there are means deemed feasible for an employee-owned co-operative to succeed, they will be identified by the feasibility study. The most viable and acceptable option is chosen and pursued by the buyout association and the next steps can be pursued.
  5. Business plan. At this stage, the buyout association has identified it can successfully pursue an employee-owned co-operative. The details from the feasibility study as well as some refinements, explaining how the new co-operative will generate the money to replay the bank and reward the investors, makes up the business plan to be presented to potential investors and/or lenders.
  6. Negotiate the transaction and identify the management/employee structure of the agreement. The feasibility study will have identified a reasonable estimate of the company’s value as well as how much debt the new ownership will be able to support.
    The buyout association incorporates the worker co-operative with input from all employees, and develops a governance structure for the employee-owned co-operative which will encourage all of the employee owners to contribute constructively to their co-operative’s future success.
  7. Get the financing. Thanks to the feasibility study, capital expenditures and working capital needs of the co-operative will have been identified and will be taken into account when arranging financing in a addition to the agreed upon purchase price.
  8. Close the deal!

Information courtesy of Canadian Worker Coop Federation.

You can get more information on the steps in a buyout: Steps in a Buyout. Please note that this link will be within the US legislative and policy framework. Some concepts will not be relevant in Canada.