Building and running a successful business is hard work and involves a significant portion of your personal wealth and time. As retirement approaches, owners considering the sale of their businesses must identify a method that will ensure sufficient financial resources for a fulfilling retirement.
Selling the business to one or more key employees is an often-overlooked exit strategy. Owners may feel that their trusted employees have earned the chance to take an ownership stake, based on their long track record of driving performance and contributing to the success of the business. Another benefit of an employee sale is avoiding a third-party sale and the involvement of a business broker, which can be expensive and time-consuming.
Consider these factors before selling the business to an employee
Are you considering a sale to key employee among your succession plan options? If so, make sure to walk through the following reality checks:
- Would the employee make an effective business owner? The person you choose to take over your business should possess the motivation, risk tolerance, personality attributes and leadership qualities required of a business owner.
- Does the employee have the necessary funds or resources to purchase the business in a cash transaction?
- The employee most likely does not have the capacity to acquire a bank loan to purchase the business in a cash transaction. This financing challenge may be exacerbated if the business has significant intangible value, which is viewed as less than ideal collateral.
- Given the financing concerns raised above, do you as the selling owner want to provide a significant amount of seller financing to support the transaction? After all, you assumed the investment risk of owning the business; why exchange that for collection risk? If the new owner fails, your note receivable may lose value.
- These dynamics make it challenging to fully transfer to an employee in an upfront, primarily cash transaction. If you want to cash out as quickly as possible, you should search for an external buyer.
- Searching for an external buyer is the better option if maximizing the selling price is your primary objective. A potential buyer in the same industry or one looking to vertically integrate operations and maximize synergies is better positioned to make a higher offer than an employee willing to step into your shoes. That’s why it can be beneficial to conduct a preliminary assessment to determine how much money the owner may be leaving on the table with an employee sale.
Considering the points raised above can help an owner ensure that a sale to one or more key employees is the best route. The succession planners at RKL have decades of experience helping owners evaluate their exit options and identify the ideal plan for their needs and goals. Contact us today for guidance and support during this significant transition in your business and life.
For business owners committed to moving forward with an employee sale, our next installment will highlight concepts that may be helpful in designing a transaction that works for both buyer and seller.