Why Internal Sales Fail

You run a business. You’re self-made.
You’ve made tough decisions, you’ve taken risks.
You’ve been through ups and downs.
You’ve developed a pretty calloused personality.

You’ve seen it all.

The Dilemma: Do You Want to Pass the Torch to Financial Investors? 

Underneath that rough leathery exterior, you care so much about what you’ve built, but perhaps more so who you built it with.

When your thoughts turn to your exit, it boils your blood to think about handing your baby over to an outside investor purely seeking to make a financial return on investment… it hurts to consider the idea of allowing some investor off the street to step into your shoes as owner; someone with no previous history with your customers, your employees, your vendors, your products & services.

It just feels wrong.

For you, it’s been about the money, sure …

But it’s always been about more than money. Much more.

It’s about the opportunities and livelihoods you’ve created for your team; the leaders and managers you’ve assembled around you.

It wasn’t necessarily a team you put together with any particular strategy. When you started out, you were the President, Head of Sales, Finance Manager, Plant Manager, Janitor, and IT guru.

As you found new customers, you had the privilege of hiring your first non-family members. Over the next few years you just kept filling the next need as it came up, and your headcount continued to rise.

One day you blinked and realized you had a core team that you couldn’t live without.

Now that you’re starting to feel the pull of your other interests more and more. You’re tired of the early mornings, the long days, and the evening commitments. You are ready to see what’s next. And it dawns on you, “What happens to my core team when I sell my business?”

So you hatch a plan. You’ll sell the company to your top employees! It makes so much sense. They’re the most capable people.

They know everything you know; the good, the bad, and ugly. They know your greatest customers and your scariest skeletons. You’d never want them to end up reporting to someone else who might want to change everything and wreck the DNA you’ve instilled.

The Pitfalls of Internal Succession

In theory it’s a great idea. But does it work in practice? In our experience, rarely.

What’s the key reason? Your employees are not you. For you, it’s second nature to take risks. Your leadership team has built your company with you, but it’s you who has always been responsible for payroll at the end of the day. It’s you who gave yourself no way out. It’s always been you they’ve looked to when things have gone wrong.

If you’re thinking about retirement, you're later in your career and guess what? So are your key employees.

Perhaps they’re younger than you. But remember, they’ve spent their whole careers in the safety of a regular paycheck. Now in a later stage of their careers, do you think they are excited to stick their necks out and take on such a massive change in role from employee to employee-owner?

Great managers and leaders do not necessarily equate to great owners.

Here’s another obvious point: you and your team have been successful at building a great company. But guess what? You know what you’ve paid them all along. Where’s the money to buy you out going to come from? Not from them. It’s the company’s profits itself that are going to be needed to buy you out over many years. That means when you think you’re leaving, you can’t, as your security is tied to the business's continued future success. 

Exploring External Sale Options

Many times in the history of Doescher Group, we’ve walked this path with our clients. Sometimes it works out and we are able to successfully execute an internal transfer of ownership to the next generation. However, more often than not, an internal sale is determined to be nonviable … primarily because it’s simply not what the employees want.

This realization points to the attractiveness of external sale options.

The beauty of an external sale option is that it not only aligns with your desire to move on but also addresses your top performer’s desire for a paycheck and growth opportunities.

You see, there are some obvious downsides to selling to an outside investor, such as a private equity group. Your name may change, the culture may shift, the company will get bigger and more corporate. On the other side, outside investors seek to align their financial incentives with the incentives of top management through stock incentive programs. They also seek to bring your products and services to more customers and markets. They are willing to invest capital in taking risks that often bring new opportunities to your people, not less. While it’s not for everyone, some in-depth education can go a long way to assuaging concerns you might have about the path of external sale.

If exploring the world of external sales options feels like unfamiliar terrain to you, you aren’t alone. Here at Doescher Group we level the playing field for self-made business owners like you, empowering you to exit on your terms with confidence and ease. If you’d like our take on your exit options, please reach out - we’d love to help.