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Terms Are Cash

Dear Dave
We are developing plans to sell stock in our firm to several of our key employees. We are thinking about requiring a cash down payment of 10 or 20% of the purchase price with the option of either a payroll deduction program for the balance remaining, or to offer company stock in lieu of future bonus distributions for as long as it takes to accomplish the buy-in. Comments?

Dear CR
I know I’m probably going to catch some grief from at least a few readers for this, but I maintain a strong bias that all stock buy-ins should be 100% cash up front—Period. Programs with small or no down payments, combined with easy payroll deduction plans or future bonus deferrals, are too benign and can result in a crop of owners who are not always fully engaged. Should things go sour down the road, disengaged owners act more like passive investors and typically look around for someone else to blame for the fact that there will be no salary increase this year, or bonuses will come up short, not realizing they, too, must look in the mirror and bear the burden.

Buying-in is serious, sober business that involves substantial risk and responsibilities. Underplaying this aspect, in part with tepid financing plans, is a disservice to buyer and seller alike. Because owning stock in a typical private engineering firm does involve risk and responsibilities, any offer to buy-in must also represent the highly likely potential of substantial future reward great enough to counter the fear of risk on the part of the candidates. A potential buyer needs to objectively and fully assess the risk/reward relationship and be willing to make the commitment, with eyes wide open, to mortgage the house to the bank, or deplete savings, or borrow from their retirement plan. New owners that place it "on-the-line" in this manner, and accept risk, generally make for a crop of much more attentive (engaged) principals.

Wahby and Associates