Where Do You Want the Ownership of Your Company to be in 3, 5 or 10 Years?

This is the first in a two-part series: Where Do You Want the Ownership of Your Company to be in 3, 5, or 10 Years? In this first post, we introduce the Ownership Transfer Matrix. In the concluding post, we dive deeper into the ownership question.

The ownership of your company will transition and change over time. That is a certainty. Several questions are valid when we think about ownership transitions. How will ownership change? Why will it change? When will it change? To whom will the ownership pass? The last question in this series is the following: Where do you want the ownership of your company to be in three, five or ten years?

These questions are far too important to leave their answers to the fickle finger of chance.

Ownership of Your Company Will Transition

The Ownership Transition Matrix is discussed in my book, Unlocking Private Company Wealth. It is reproduced here to facilitate our discussion.

It may be obvious, but it bears stating. You will transfer part or all of your ownership in your business over time. And you will transfer it voluntarily or involuntarily, as seen on the horizontal and vertical labels on the matrix. The matrix therefore contains four quadrants:

Voluntarily transfer a portion of your ownership. You can transfer portions of your ownership in a variety of ways such as gifting or selling. Either avenue requires strategic personal thinking. If you transfer by gifting, you need to be sure that your children understand the nature of their ownership in the business and learn to appreciate their investment(s) in it. If you transfer a portion of your ownership by selling, you have to decide to whom and how and at what price and terms. Selling a portion of your ownership can help create liquidity outside the business, and can facilitate other goals, including orderly ownership and management transitions over time.
Voluntarily transfer all of your ownership. A total transfer can be the result of a series of partial transfers as noted in Quadrant 1, or through the sale or other disposition of the entire position. Again, strategic personal thinking is called for on the part of owners. Strategic planning may be necessary or appropriate for the company as well.
Involuntarily transfer all of your ownership. Quadrant 3 does not represent the most favorable set of options for most business owners. Death, bankruptcy or divorce are not the most pleasant things to think about, but these things happen. When they do, you will or may be forced to divest all of your ownership in a business. Strategic personal and business planning is necessary to avoid most of the possibilities in Quadrant 3. If a death triggers your company’s buy-sell agreement, it is essential that the agreement have been established so that it provides for a reasonable pricing mechanism and terms. It is important that the parties agree on the use of proceeds from any life insurance in advance. Are the life insurance and proceeds a corporate asset and included in value or a funding mechanism to purchase stock and not included in value? If you don’t agree with your fellow owners now, you or they will almost certainly disagree if or when a death event triggers the buy-sell agreement.
Involuntarily transfer a portion of your ownership. Things can happen where you will involuntarily transfer a portion of your ownership. A forced reorganization of the business, the loss of a portion of ownership in a divorce are just a couple of examples. It is a good idea to think strategically in order to prevent such things from happening to you.

In our next post, we discuss ownership options in greater detail.