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Why Welcoming Key Managers into Your Ownership Team Could Make Sense Right Now

July 7, 2020

by Scott Danger, CPA, CVA, and Andrew Brower, MBA, ASA

Your key managers are the people who keep your business afloat. They may also be the people to whom you plan to transition your business. If this is true for you, the present moment—i.e., in the midst of an economic downturn—could be an ideal time to act. Here are a few things to consider if you plan to explore this opportunity.

What would welcoming key managers into your ownership team involve?

When we say “key managers,” we aren’t referring to family members who work in your business. Transitioning your business to your heirs is an entirely different situation involving an entirely different set of considerations. For the purposes of this article, key managers are the individuals who hold top leadership positions in your business.

You likely wouldn’t gift shares to managers as you would to your children. Instead, you might give managers the opportunity to purchase shares, or issue shares to your managers through a bonus plan. The option you choose will depend on your current financial situation and goals.  If you sell shares of your business outright, you may pay capital gains tax on the sale. On the other hand, if you issue shares through your company, you could avoid the tax, but you wouldn’t get cash for your shares. You also may be responsible for payroll taxes on the issuance of shares.

Why sell or issue shares to key managers? 

There are a few strategic reasons for elevating managers to owners. A key manager who becomes an owner is likely to stick around, allowing you to retain this talent. Offering ownership opportunities to managers can be a way to incentivize performance, too. Lastly, if you decide to sell your business in the future, your manager-turned-owner would likely be a motivated buyer.

How many shares should managers hold? 

The number of shares you sell or issue to managers will depend on several factors. These include the size of your company, the number of existing owners, and the number of key managers in your business. For instance, if you have only one key manager, transitioning 10% of your business to this person might make sense. However, if you have five key managers, you probably wouldn’t want each one of them to hold 10%—or 50% altogether—of your business.

Then there’s the fairness factor. If you have several key managers, it could create discord if you were to give only one manager ownership status. What about your existing owners? Are they OK with elevating managers to be their equals? As you can see, it’s important to think through the intrapersonal ramifications of the transition, too.

When should you act?

During an economic downturn, the market is depressed. This means the value of your business  may be depressed, too. If you were to offer shares of your business to managers right now, they could potentially acquire them at a lower cost.

Nevertheless, now is not a time to make rash decisions. If welcoming key managers into your ownership team has been your plan, consider taking action soon to take advantage of the temporary downturn.

See what’s possible.

With careful consideration, transitioning your business to your key managers can be a win-win for all. If you’d like to see what’s possible in your situation, our team can help. We’ll work closely with you and your attorney to help you assess the value of your business as well as the tax implications of selling or issuing shares. Learn more here!

Scott Danger, CPA, CVA, is a Partner in the Advisory and Business Valuation segment at Abdo, Eick & Meyers. He is a Certified Valuation Analyst providing business valuation and litigation support services to clients throughout Minnesota. 

You can reach Scott at 507.304.6826 or click here to contact him via email.

Andrew Brower, MBA, ASA, is a manager in the firm’s Business Valuation and Litigation Support department and helps his clients gain valuable insight into their business so they can take the crucial next steps into their financial future.

You can reach Andy at 952.449.6234 or click here to contact him via email. 

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