A question faced by many business owners, once the owner has decided to begin succession and possibly sell all or a part of a business, is how much to sell of the business? This is not a question to be taken lightly and requires considered thought and input.  A minority interest has not only legal but also operational implications.  The business will change because it would have other direct owners, whose rights to

– internal accounting and other information of the company

– input on operational and strategic decisions

– future share issuances of the company

will make decision making for the company and implementation of its strategy more of a collaborative process.   Selling a minority interest in the company may be the most effective interim step to allow a smooth and gradual transition of the business to its new owners.  With this plan in mind, the majority owner will face new dynamics to which he/she is unaccustomed.  In all circumstances, preparing and ratifying a shareholders’ agreement is critical to set out how certain events, including death, disability, departure or divorce will be addressed as it relates to the shares owned, particularly of the minority shareholder.

We are currently working with a business where the entrepreneur is beginning succession with her family members and they have become minority shareholders in the business.  The big issue is that she is the typical entrepreneur who is used to making quick decisions for the business without seeking input of others.  Governance of the business previously was not clearly defined and had to be for the benefit of the new shareholders.   She is beginning to understand that her decisions

1. affect other people, and

2. it is incumbent on her to allow others to begin making those decisions or at least allowing the new decision makers to have input in the decision making process.

After about 1 year of intensive family governance work and laying down guidelines and rules, the family is in a better place. The prior majority owner now allows other family to make certain decisions in specific operational areas of the company and seeks their input in many of the other decisions, both strategic and operational.

The plan is that in about 5 years, the matriarch will be able to either reduce hours at the business or in a perfect world, step down and yet retain some control / interest in the business.

This is an example of success in succession.

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