Business succession within your own team

Many owners think of succession as finding a buyer from outside: a competitor, an investor, a larger company. There is another route that gets discussed less often: handing the company over, step by step, to the people who already carry it.

Context

Why succession within the team

Sometimes there is simply no suitable buyer. Sometimes there is one, but you do not want to hand your clients, culture and people to a stranger. Either way, the answer is often already inside: one or more employees who know the company and want to carry it on.

Obstacles

Why it rarely happens at once

• The purchase price. A healthy company is worth more than an employee can pay in one go, even with a bank loan.
• Experience as an owner. Being good at the work is different from being responsible for the numbers, the bank and the long term. You do not learn that on the day of the transfer.
• Trust on both sides. You want to see that the successors can handle it, they want to see that the company keeps running without you.

A phased transfer solves all three at once: the price is spread over years, the successors grow into their role, and together you build a track record.

Route

A route in three phases

Phase 1: share in value without a transfer

The intended successors receive virtual shares, possibly with a virtual dividend. They share in profit and value growth as if they were shareholders, and see the numbers the way an owner sees them. You keep ownership and control. If it does not work out, nothing irreversible has happened. If it does, the successors have built up money they can use in the next phase.

Phase 2: a first block of shares

The successors buy a first part of the shares at fair value. If you want to keep control for a while, you can use depositary receipts held through a foundation (STAK): the successors share economically, the foundation's board votes. The price is often financed with their own money, a bank loan and a vendor loan from you as the seller, repaid over the following years, for example from dividends.

Phase 3: the rest, and control

In the final step the remaining shares and control pass over. You step back as director, possibly staying on as an adviser or supervisory board member for a transition period. You set the pace of the three phases together: some companies do it in a few years, others over a decade.

Plan rules

What to agree upfront

• Does a sale to your own team count as an exit? In many virtual share plans a sale of the company triggers a payout. Decide whether a transfer to the successors does too, so an internal sale does not unintentionally trigger a payout to every participant.
• One valuation formula. Use the same method for the value of the virtual shares and for the purchase price of the real shares. Two different values for the same company are a source of argument.
• What happens to the virtual shares at transfer. Pay them out at the agreed value, or let them run on until a later moment.
• A successor leaving. Vesting and leaver rules for the virtual shares, and an offer back arrangement for shares already bought.
• The timeline. Milestones per phase, with room to speed up or slow down when circumstances change.

Team

The wider team

Succession is usually about a few people, but the company runs on the whole team. Not everyone has to or wants to become an owner. You can let the shares go to a small group of successors, while the rest of the team keeps sharing in what they build together through virtual shares or profit sharing. That way succession does not feel like something happening over the team's heads.

If a plan covers a group of employees and your company has a works council (or a similar employee body), involve it early. Read how to involve the works council in employee participation.

Tax

Tax and legal

A few points to raise early with your tax adviser and lawyer. The examples below follow the Dutch rules; other countries work differently:

• Payouts from virtual shares and a virtual dividend are salary at the moment they are paid.
• If an employee buys shares below fair value, the difference is generally salary.
• If an employee acquires more than 5% of the shares, this is a substantial interest, with its own tax framework. See also which tax box each form falls into.
• For you as the seller, the transfer has its own tax consequences. There are arrangements for transferring a substantial interest, including to employees, with their own conditions.
• Legally, the articles of association and a shareholders' agreement play a big role: transfer restrictions, offer obligations, decision making, and what happens on leaving or death.

Checklist

Checklist before you start

• You know who your intended successors are, and they know it too.
• There is a timeline with milestones per phase.
• There is one valuation formula for virtual and real shares.
• Your plan says whether a sale to your own team counts as an exit.
• The financing of the purchase price has been calculated, including for a weak year.
• You know how the wider team shares in value, and how you will explain it.

Sharesquare provides software and knowledge, not tax or legal advice. Have your succession guided by a tax adviser and a lawyer.

Knowledge base

Frequently asked questions