What are some commonly used techniques to transfer the business to insiders?
Minneapolis attorney Sally Grossman describes techniques often used to transfer the business to insiders.
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The kinds of techniques that you would use to transfer a business to an insider depend a little bit on what type of insider we’re talking about. So, if we’re talking about transferring to other shareholders, that’s normally going to be governed by a buy/sell agreement or a shareholder control agreement. Either the company’s going to buy out your interest, which automatically increases the interest of everybody else, or possibly there’s a cross-purchase agreement where the other shareholders are going to have to buy you out, either at death, disability, retirement, divorce, it could be a whole number of factors.
So, usually a shareholder control agreement will govern and tell you how you do the sale, and it’s always a sale for shareholder insiders. For management insiders, it’s usually a management buyout agreement and again, this would be a negotiated agreement, but as opposed to a sale to outsiders, it can be quite a bit simpler to negotiate. This is because you know the risks of the business, and the insiders know the risk of the business, so unless there’s some kind of third party financing involved, the due diligence is a lot less, it’s an easier and quicker transaction.
You probably aren’t going to get quite the same value you’d get if you sold to an outsider, and you may have to do seller financing because frankly, your management team, no matter how well you’ve paid them probably can’t afford to buy your business.