Is Selling Your Business to Your Employees Worth It?
As the owner of a corporation, you must face the fact that, at some point, you’ll leave the business. Whether you wish to retire, want to try something else, or otherwise find yourself unable to run the company, having a proper exit strategy is essential.
While most business owners consider selling their enterprises to investors on the market or turning the business over to a trusted family member, there’s another option — selling it to your employees.
Selling your business to experienced employees provides several benefits, the most apparent of which is that they’re already well-versed in your organization’s operations. This is true whether you’re considering selling a(n):
- Construction business
- Dental practice
- Family business
- HVAC business
- Software business
- Any other type of company
Let’s consider those greater advantages and how you can make them happen.
3 Advantages of Selling Your Business to Employees
There are numerous benefits of selling your company to your employees. A select few include the following:
1. Internal Knowledge
Your employees are the most reliable people, besides yourself, to fully understand your business operations. You won’t need to worry about training any newcomers on your processes or introducing them to your primary customers, as your employees already understand your processes and likely regularly interact with your clients already.
With the knowledge they have, employees can ensure a streamlined process without any major hiccups. They understand the organization’s strengths and will likely remain committed to furthering its growth and long-term profits.
2. Retain Customers
Sometimes, when customers learn of a company’s ownership change, they wonder if the new team will be up to the challenge. Will there be problems with their future purchases? Will the quality of their products or services suffer?
You can reassure your customers by letting them know that, although you’re leaving, the team taking over is highly familiar with them and all pre-established processes.
It’s likely your customer base already knows your workers and will feel comfortable knowing the operations aren’t significantly changing and that they won’t need to worry about product quality loss or damage to customer relationships with the organization.
3. Reward Your Employees
Some of your employees may have been with you for years or even decades. By selling your business to the workers responsible for its daily affairs, you reward them for their long-standing dedication to your company.
There are few greater rewards to an employee than giving them full ownership of your company. They’ll continue to devote their efforts to growing your business, but now they’ll receive a portion of its income as part of their return.
2 Potential Disadvantages of Selling Your Business to Employees
While there are many benefits to selling your business to employees, there are also a few possible drawbacks, including:
- Employees who don’t know how to handle stepping into the owner role.
- Your sales price being limited
Here’s a closer look at each of these possible downsides and what you need to know to avoid the costly mistakes associated with selling a business.
1. Employees May Not Know How to Handle Ownership.
Employees can have an intricate understanding of your business’s operations, but they may not possess a mindset of ownership. Proprietors must think strategically, considering their decisions’ potential benefits and risks and having an understanding of business fundamentals.
Not all companies’ employees are familiar with the entrepreneurial spark that is necessary to run the entire organization. They may be very comfortable with their daily responsibilities but find themselves at a loss when set to oversee all the functions of the business.
2. Your Sales Price May Be Limited.
Employees don’t often have the capital that other investors may have to buy a business. If selling your business is set to make up a significant portion of your retirement income, turning it over to your employees at a lower price can reduce your standard of living in your later years.
You’ll want to carefully consider the financial implications of selling to employees, and if you think selling your business to an outside investor is financially safer, turning the organization over to your workers may not be the right option.
How to Sell Your Business to Your Employees: 3 Ways
Most employees don’t have a large stack of cash they can rely on to purchase an entire business in one fell swoop. Instead, you may have to give them some leverage to finance their purchase. A few ways business owners can help employees buy their company include via a(n):
- Long-term installment sale
- Leveraged managed buyout
- Modified buyout
Here’s a closer look at each of these ways of selling a business to employees
1. Long-Term Installment Sale
A long-term installment sale provides employees with an easy way to purchase the business without putting much (if anything) down on the organization. You start the process by obtaining a company valuation to determine its worth.
Once you agree on a purchase price with your employees, you’ll offer them a promissory note, and in exchange for handing over ownership to them, you’ll receive regular payments until they pay off the loan.
Long-term installment sales don’t typically provide owners with much money upfront, but they do produce a valuable income stream you can use during retirement.
However, if the business takes a sudden turn for the worst, your employees may be unable to continue paying you. Missed payments can be disastrous, especially if you’re relying on them as a significant portion of your retirement income.
2. Leveraged Management Buyout
A leveraged management buyout is advantageous for owners looking for an immediate cash-out of the organization. Essentially, you find a financial partner, like a lender, venture capitalist, or private equity firm, to provide your employee the funding they need to purchase your business.
Leveraged management buyouts do have drawbacks. For instance, the financer may place specific stipulations on their loan, requiring that you show a particular cash flow and regular customers. You will also need to prove that there are enough assets to act as collateral for the debt.
3. Modified Buyout
A modified buyout combines elements of an installment sale with third-party financing. You’ll receive regular payments following the sale of the business from your employees, while they’ll also be responsible for repaying the financier.
A modified buyout may be easier to obtain if the organization doesn’t have many valuable assets to rely on for collateral or isn’t worth more than $5M altogether. Modified buyouts typically allow business owners to obtain a fair value for their business, which may be impossible through installment financing alone.
Selling to Your Employees Can Be Advantageous
While selling your company to your employees can provide many benefits, you’ll want to carefully consider the sale details before signing it over. You don’t want to take too much of a loss on a business you’ve worked hard to build.
Selling your company to your workers can ensure your operations don’t change too much and that your customers remain dedicated to your organization. You’ll also reward them for their work in making the business what it is today.
Before making a decision, do your research to understand your available options. A thorough comprehension of the alternatives can help you determine what’s right for you, your employees, and your company.
Need Help Selling Your Business to Your Employees?
Cowen Partners’ approach is notable because we are one of the nation’s leading executive search firms and are in touch with potential buyers daily. Our Partners come from a diverse set of backgrounds and skills, ranging from business owners and entrepreneurs to CPAs and financial analysts.
This diversity of talent enables the team to guide our clients with firsthand knowledge and experience through all phases of the business processes of building, buying, and selling.
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