Cornwalls: Internal Succession Within a Business
By Ian Heathwood, Cornwalls Partner, Brisbane; and Anita Luland, Cownwalls Special Counsel, Brisbane.
Internal succession in electrical contracting businesses is common but often not well executed. This can result in poor outcomes for those selling, and often, for everybody involved.
This article may help you to achieve your eventual exit from your contracting business, in a way which is successful and economically rewarding for you and the people buying in.
In the current environment where it is difficult to attract and even more difficult to retain staff, it is increasingly important to consider the option of “internal succession”.
So, what does that mean?
In simple terms, internal succession is where the existing owners of the business sell or sell part of their interest to people who already work in the business, and on some occasions, sell part of their interest to an outside third party who will join the business.
What it is not, is selling the whole of the business to a third party.
Why do it?
Often, the best prices have been obtained when the existing owner’s interest is sold to the existing employees and the sale is done over time or in stages.
Often, the buyers are family members, sons and daughters of the business owners.
There is little or no disruption to the business, so to the outside world, their dealings with your business, just continue as normal. You are still there which is commonly important because you are the person the customers and clients know and trust. With an internal succession, particularly where the transition of the current owners out of the business is gradual, there is no need for any notification to clients of the change. This is not the case in a sale of business to a third party.
Another reason why existing owners of an electrical contracting business might see value in selling their equity in the business to existing employees, is that they often feel they owe something to long standing employees, especially those who have an expectation that they might eventually become part owners or own the business outright. Often these employees are family members. In our experience this does not necessarily mean that the purchasers get a discount on the price, but they may get more favourable terms of purchase, including quite often, extended payment terms.
Other reasons why internal succession is common include that it will often allow the existing equity owners to sell down their interest over time rather than selling the whole of the business in one go. For example, an equity owner could own 50% of the business and over a five-year period gradually sell out allowing them a transition out of the business in a way which will emotionally and financially suit them. Plus, it can provide a good opportunity for the in-coming business owners to learn what is involved at an ownership level as distinct from just being an employee. In-coming owners, including employees, do not always have the financial skills or business acumen needed to be a successful business owner. For example, they have probably never dealt with your bank which they will need to when they eventually become the full owner, but in the meantime, they have you to teach them how the process works.
Importantly, it can often offer the opportunity for the long-term business owners to continue to be the full owners of the premises from which the business is operated and earn a good financial return from the continuing rental of the premises to the business, into retirement.
Exclusive for Master Electricians, Cornwalls has created a guide to assist with the internal succession process. Learn more about the important steps to follow if you are considering internal succession (member log in required).
Queries
For further information regarding the above, please contact the authors.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.
Master Electricians can access free 20 minute initial consultations on a range of legal issues, and a free solicitor’s letter of demand for outstanding debts over $500 from Cornwalls. Learn more.
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