Selling to employees is one method of transition that is growing rapidly in popularity. Usually the driving motivation is a desire to help the people who got you this far enjoy some of the benefits of ownership, but there is a substantial list of other benefits.
- Pricing is agreed at the start, not in adversarial negotiations.
- Valuation is flexible. The business can be sold for more or less than its Fair Market Value, as long as both sides agree and cash flow supports it.
- The legacy of the business lives on in the community.
- Where there are substantial challenges to an outside buyer, such as industries where work goes to the lowest bidder, employees are more confident that they can succeed in the system.
- Financing is built into the transition plan.
(By the way, if you are just picking up this series now, prior topics included strategies that aren’t suited to small business, selling to a third party, and selling to family.)
“But they have no money!”
That’s the most frequent objection when we suggest an employee sale, but it is easily remedied by time. In fact, time and risk are corollaries. The more time you have, the less risk you’ll take. Faster is riskier.
At one end of the spectrum we’ll say you want to exit the business in the next thirty to sixty days. That’s probably enough time to draw up a purchase agreement and transfer ownership. The payment for the business would be entirely in an installment note from your workers. Rapid exit, but maximum probability that you will never see the entire purchase price.
On the other hand, what if you have five to ten years for selling to employees? You could sell stock for a note, and let employees pay for their shares with bonuses based on increasing profitability. They are motivated to grow the company, while you continue to receive all the profits you were due anyway.
As they increase their ownership, they can qualify for lender financing to purchase your equity. Done well, and with enough time, you can realize the full value of the business and increase your short-term income along the way. Time gives you lower risk, and the potential for higher reward.
Are they qualified?
That is another question entirely and one that depends largely on you. If you’ve hired the right people and trained them well, selling to employees is a breeze. If you are the center of everything that happens in your business, it could be a problem.
Remember, the more you work in your business the less it is worth. To see how dependent your business is on you, take the quiz at www.ownercentricity.com.
What if they are willing and able, but not ready? Or perhaps you have a few key managers, but they lack some critical skill sets? Again, time gives you the flexibility to deal with those issues.
You may not have anyone who could ever run the business. Again, with suffcient time, you can “hire your buyer.” I’ve seen businesses where an owner used the promise of ownership to recruit someone whom he’d never attract otherwise.
Selling to employees is the ultimate exit plan in your level of control over the process, determining how much you want from the transaction, and choosing your date of departure. If you haven’t considered it in your list of options, you might want to think again.
Its especially important to get spouse signatures on these agreements. Valuations and agreements between family are fine, but an outsider (especially an ex-spouse) may not be as amenable.
Business Brokers can be cynical about their clients. They commonly complain that the best businesses sell through their accountants, bankers, attorneys or word of mouth. Their listings consist mostly of the “Dismal Ds,” (Death, Disease, Disaster, Divorce, Declining sales, Dissention among partners, Disinterest etc.) While this is an exaggeration, it’s true that the better shape your business is in, the more likely it is to sell easily.
As usual, great input from the experienced one!