Succession Planning - Should You Use Projections to Price the Company for Internal Sale of Shares?

This is a common succession planning question from owners in developing internal transfer of ownership programs.

Many owners have tried to use profit projections in pricing sales of shares to key employees and it has caused many transition plans to fail.

The main reason profit projections fail is that it often leads to a winner and a loser.

When a pricing mechanism creates a zero-sum game, tough negotiations and damaged future relationships creep into the equation.

When creating a share price formula it is important to remember that it is easier to assess what has been than to try to predict what will be.

One company that used future projections to price their shares sold to key employees demotivated all of the Company's management.

The President and largest shareholder was retiring.

He received an inflated value on his shares based on very high price projections that he persuaded the CFO to make.

All the shareholders who purchased the shares based upon these rosy projections were demotivated when they discovered that the projections were fabricated.

The president received a much higher price for his shares than he should have based on the inflated projections just as the market was sliding into a recession.

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