How to Transition Ownership of a Business: Current Transition Trends for 2023

If you’re thinking of selling your business, you may be tempted to sell the business internally. While internal business ownership transitions can sometimes be successful, they often fail based on today’s environment and challenges. As you consider a transition, take a moment to learn more about the various ownership transition options and current trends that might influence your choice. 

Why Do Sellers Often Prefer to Sell Internally? 

Many sellers prefer to sell internally for several reasons. For example, they may have heard horror stories from friends about the difficulties of an external ownership transition or believe that an internal sale will help their brand live on to the next generation. 

Others may simply want to avoid the process of an external sale, as the process can be complicated if they don’t have professional help. Some potential sellers may also believe they haven’t prepared enough for an external sale and won’t be able to complete it successfully in the amount of time they have allocated for transitioning out of the business.

Why Do Many Internal Sales Not Work?

Despite many business owners’ desire to sell their company to an internal buyer, the process comes with many unexpected challenges that cause the internal sale not to work. Some of the main challenges internal sales often face include:

  • Not enough funds to pay fair market value: One of the biggest problems internal sales often face is that internal key stakeholders may not have enough cash to pay fair market value for the company. As a result, the current business owner will have to take a pay cut if they still want to sell internally, which isn’t ideal for most sellers.
  • Age and interest of potential internal buyers: Another challenge of internally selling is that key stakeholders often don’t have an interest in owning the company. At times, this lack of interest can come from the ages of key stakeholders who are nearing retirement and don’t want to take on extra responsibilities. Since owning and operating a business comes with unique challenges and stressors, even your younger internal leadership team may feel content staying in their current roles rather than taking on ownership of the company. 
  • Too fast of a transition timeline: When a current owner is looking to sell, they’re often looking towards transitioning their business within the next three to five years. This short-time frame gives little runway for the next-level leaders to step into an ownership role from a financial perspective, a personal timeline perspective (how long until they are thinking about retirement?), and a professional growth perspective. As a result, many internal transitions end up taking longer than five years, making it so current owners have to spend more time owning their businesses and training their internal staff to take over.

The Current Trends Affecting the Success of Internal Transitions

Besides the reasons above, many next-generation leaders have different priorities than the previous generation. These different priorities can make your younger internal leaders resistant to the opportunity of owning your business. Some of the top trends that cause young leaders not to want to own a business include:

  • More of an emphasis on work/life balance today
  • Families having children later in life
  • People are purchasing homes later in life
  • More of an emphasis on remote work today
  • More of a culture of “job hopping” to the next great thing
  • A nomadic culture with workforces is becoming more common

What Are The Best Current Transition Options for Sellers?

Since internal sales can be challenging for business owners, they may want to look for another option. Employee Stock Ownership Plans (ESOPs) and external sales are two of the best options for a faster, more lucrative ownership transition for a business owner. If you’re interested in exploring other transition models, learn more about both options below:

Employee Stock Ownership Plans

An ESOP is an employee benefit plan that gives workers ownership interest in the company in the form of shares of stock. ESOPs give the sponsoring company—the selling shareholder—and participants various tax benefits, making them qualified plans. These plans are also often used by employers as a corporate finance strategy to align the interests of their employees with those of their shareholders. Essentially, these plans allow business owners to make an internal sale without anyone in the firm writing a check.  

Some of the top features of an ESOP include: 

  • Significant tax benefits to the seller and the firm
  • Allows employees to buy out the owner with funds they wouldn’t have otherwise
  • Heavily regulated 
  • Takes significant planning and a specialized team to execute

External Sales

If an ESOP isn’t the right option for your business, you may want to consider making an external sale. Unlike internal sales and ESOPs, which can be more complex, external sales are often the easiest and simplest way for an owner to exit a business. They also usually allow business owners to receive a fair market value for their firm, ensuring all their years growing their business are compensated fairly. During external sales, key employees are usually typically required to stay for a period of time, with this requirement assisting with stability.

A successful external sale will need detailed ownership transition planning to ensure the buying firm is a good cultural fit. As you look for buyers, you’ll want to have a clear understanding of what your company culture and values are. By identifying your values and culture, you’re more likely to find a transactional partner that aligns with your organization.

Choose Thinc Strategy for Business Ownership Transition Services

At Thinc Strategy, we’re proud to offer mergers and acquisition advisory services to our clients. Whether you want to make an internal or external sale, our merger and acquisition advisors can walk you through your options. We also can assist with creating and implementing ESOPs, ensuring we can personalize our services to whatever ownership transition you’d like to begin. With our ownership planning services in your corner, you can know you’ll receive in-depth insights, customized service, and maximum value for your business and goals.

Learn more about our transition services today. If you have any questions or want to schedule a free consultation, please contact us.