Making the transition from business owner to employee after selling your business is something that many entrepreneurs aren’t well prepared for. Friends, I’m not referring to those who’ve sold their companies and must now find a job. Instead, I’m talking about those who do as I recently did, selling their business and staying on as an employee. Are you truly prepared for that type of transition? Can you handle it? In this entry, I’m exploring how to go from owner to employee in your own business.
Follow Along With The Financially Simple Podcast!
This week on The Financially Simple Podcast:
- (2:15) Employment agreements and Earn-outs
- (5:20) Can you handle the change?
- (7:40) A new set of benefits
- (10:01) Lowered risk
- (11:30) Don’t do it alone
Why the Transition from Business Owner to Employee Might be Necessary
After making the ultimate sale, you have many possibilities for how you choose to spend your next chapter of life. If you’re following a well-thought-out exit plan, you likely already know what life after the sale of your business. However, it may be beneficial to you and the new owners to remain active within the organization for a time. But how?
As the seller, you could receive a higher purchase price through compensatory payments as part of an earn-out agreement. The additional compensation tied to the earn-out agreement could be associated with reaching certain financial and growth milestones, or simply with remaining employed for a pre-determined time. You benefit from this scenario by receiving a higher payout and being able to provide stability, ensuring your legacy remains intact.
The new owner gets peace of mind, knowing they have a reliable employee with intimate knowledge of the business operations. Likewise, combining an earn-out agreement with an employment agreement offers the new owners a preferable tax treatment for earn-out payments. This is because payments for compensation are immediately deductible (so long as the payments are reasonable for the role) while payments on the purchase price must be capitalized.
You Can Handle What You Desire to Handle
Making the transition from business owner to employee isn’t going to be easy. I started my first business when I was 15 years old. Being a business owner is all I’ve ever known. Over the past 30 years, I’ve launched, grown, and sold six different businesses for profit. Friends, that’s a long time.
Because of this, I thought I would always be a business owner. In fact, I had a real disdain for the idea of ever being an employee. Not because I’m above it or because I thought there was anything wrong with being an employee within a business. On the contrary, I have had the honor and the privilege of working with some extraordinarily talented people throughout my career. But I was trained to be a business owner. It’s all I’ve ever known and I’ve always aspired to be a leader out in front, doing the hard tasks to ensure the success of our team. Chances are, you’ve felt the same way.
So, can you handle it? Are you ready to relinquish control and join the rank and file? What I can tell you is this… you can handle whatever you desire to handle. Whether you think you can or think you can’t, you’re right. Transitioning from owner to employee means you’re giving up a lot of the benefits you’ve enjoyed as a business owner. You won’t be able to make decisions about the direction of the company anymore. You’ll probably even deal with a sense of loss. After all, studies have shown that entrepreneurs develop a similar bond with their businesses as parents with their children.
A New Set of Benefits
Although you’re giving up the benefits of business ownership, you will experience an entirely new set of benefits. Since transitioning into my current role, I’ve had fewer worries to keep me up at night. I’m no longer going home and thinking about what will happen to the business if we lose a particular client. There isn’t that concern about what happens if one of my team members gets hit by the proverbial logging truck. Now, I still care about these things, but the weight has been lifted from my shoulders. I’m no longer the one responsible for every detail.
Another benefit is that I’m no longer isolated. Being at the top is a lonely place. While you might not be truly alone, there are very few people in the entrepreneur’s life that really understand what it’s like to be a business owner. Since selling my business and transitioning from ownership to employment, I feel like I’m part of a team. Once you make the transition, you actually have the ability to go out and make the plays, rather than simply calling them from the sideline.
Likewise, you might discover that stepping away from the owner’s seat allows you to take risks without being personally liable. When you’re the owner, you incur a lot of risks. I know one business owner in particular who has a $15MM liability that could personally bankrupt him if the business fails. He told me, “Justin, once this risk is gone, I can be more ‘risky.’” In other words, he isn’t able to grow his business as rapidly as he’d like to because he can’t afford to take any risks with that kind of personal liability.
Friends, that’s not the case once you transition from business owner to employee. You’re no longer focused on how risk affects you personally. Instead, you’re focused on the mission of the company. So, you must understand that you’re trading one set of benefits for a different set, but you’re also giving up a lot of stress and relinquishing all of your risks.
Transitioning from Owner to Employee
If you’re transitioning from owner to employee, one of the best things you can do is to seek counsel. Surround yourself with a great advisory team and speak with others who have been through this transition before. If you don’t have people you can talk to about a transition, reach out to our team. We’ve got a team full of people who have been where you are now.
Likewise, you must be honest with yourself. You’re going to face new challenges. You’ll likely deal with irrational emotions such as resentment that you’re no longer consulted about decisions regarding the direction of the business, or even seller’s remorse. This transition will be difficult. But you’re an entrepreneur! You’re used to taking on difficult or even impossible situations.
Look friends, making the transition from business owner to employee is tough. There are emotions that you’re going to have to deal with. Similarly, there will be an adjustment to how you approach things. However, just because it’s difficult doesn’t mean it isn’t worth doing. There are benefits to be enjoyed by making the transition. At the end of the day, it all comes down to attitude. Are you going to exhibit the attitude of success that got you to this point, or will you focus on the things you’ve given up?
Hey, life is hard. I understand. But you get out of it what you put into it. So, life is hard but life is good. Transitioning from owner to employee can be frustrating but it doesn’t have to be. With the right attitude, you can make the transition from business owner to employee, at least, financially simple. Let’s go out and make it a great day!
As you enter into this transition, you’ll need sound advice from others who have experienced a similar transition. That’s one of the many areas we can help. Reach out to our team to learn more about making a successful transition.