Lifestyle vs. Legacy
Why would I refer to the results of an internal transfer as “lifestyle vs. lucre?” Lucre is a pejorative term. While it is technically just a synonym for money, most dictionaries draw the parallel to its use in “filthy lucre;” money that is ill-gotten or otherwise dishonorably obtained.
I was honored to present at the Exit Planning Summit this past weekend. One of the things I discussed was the need to help business owners determine whether their personal vision for their company’s future was based on lifestyle or legacy. That’s how I normally term it, and there is no negative connotation attached to either term.
That “lifestyle vs. legacy” decision, however, usually designates the difference between selling to a third party for full market value (lifestyle) and selling to employees in order to preserve the culture and quality of the organization (legacy.)
Legacy vs. Lucre
“Legacy vs. lucre” is my term for the differing motivations in an internal transfer, and it is fully intended to be pejorative.
For a business owner, the greatest appeal of an internal transfer is control. He or she gets to pick the new owners, their timeframe for taking over the company, and how much they will have to pay.
Sometimes, that avenue to exit is chosen because the owner knows he or she can’t get a satisfactory price in the open market. The company just isn’t worth what he wants for it.
So selling to employees becomes a vehicle to get more than fair market value. Of course, no third-party lender will touch a deal for more than the business is worth, so almost by definition such transactions have to be seller-financed.
That is one of the reasons we hear horror stories about selling a business to employees for a note, and having to take it back when they default. Their failure may have been due to a lack of training to run the business, or an unsupportable price. Either way, they were set up for failure by an owner who was more interested in getting a check than in what happened down the road.
Legacy Requires Win-Win
Selling to a third party is an arms-length transaction. Both parties have their own agenda and advisor team. The buyer is perfectly cognizant of Caveat Emptor. The seller wishes to maximize the proceeds, the buyer to minimize his cost. The result is usually something in between.
When selling to employees, the playing field isn’t even. The employees have followed the seller’s direction for a long time. They are accustomed to doing what he says. It’s when the owner takes unfair advantage of his status that legacy turns into lucre.
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John,
I have seen this happen in leveraged ESOP transactions which is so sad.
Yes Ed, That’s clearly why the Department of Labor is so much more likely to find issues in ESOPs where an employee is the trustee. It is often a warning sign of influence on valuation by the seller.