Selling a Company to Employees
With the Great Recession beginning to show its first signs of abating, many business owners are beginning to think ahead to planning their exit. As those who have dared to test the waters have found, the market has changed since the economic meltdown. While there are middle market companies for sale, in many cases, there seems to be a reality gap between what sellers expect to get paid and what buyers are willing to pay. For these owners, selling to employees may be an alternative to consider.
Some advantages to selling to employees
Passing on a legacy This instinct is not limited to the owners of family businesses. There are some business owners who feel that their company is an extended family and they would like to see that family continue.
The company may be more valuable to the employees than to outsiders Key employees, being intimately familiar with the inner working of the company may be willing to overlook minor flaws that a third party might not. They are more likely to see the true intrinsic value of the company.
Owners may be willing to enter into more flexible terms with employees than with strangers In many cases, getting a deal done is more about terms than price. In a third party sale, the objective is often "get the cash and get out." In selling to employees, owners are often willing to enter into terms that offer deferred payments which also defers taxes on the sale.
Other points to consider
Employees typically don't have sufficient cash They also don't have enough collateral, which means bank financing (especially in today's world) is very difficult. This means the owner is usually financing the bulk of the sale. With planning, this can be started in advance. As part of the exit planning, we may recommend using stock bonuses instead of cash bonuses to seed the process. Then another block of stock (though still a minority interest) might be sold with the owner financing the sale. After the employees own a meaningful interest in the company and have more experience in its management, bank financing might be more realistic.
Your best employees aren't necessarily entrepreneurs There is a reason many of your employees never went into business for themselves---they crave security, they are risk averse. Be prepared for the possibility that they may not accept your offer. The discussion about whether or not your key employees want to buy your business must take place well in advance of your desired transition date.
If selling to an employee group, conflict may arise If you do have entrepreneurial types in your midst, and you want to sell to more than one, you may have a dogfight on your hands. You may have reasons to pick more than one successor--your price is too high for just one, or you are hoping one true leader will emerge from the pack--but the damage this may cause the company can be irreparable.
Conclusion
Selling the company to your employees can be a great fallback position if the big dollars and primetime spotlight of the M & A market don't seem to be a good fit for you and your business.
The rewards of selling to your employees include keeping the company alive in your image. The terms of the deal can often have tax advantages to both seller and buyer. But selling to employees is not something that can be done without planning. The successor owners must be well trained to run the company, because the seller's fortunes are tied to the buyer's success--the buyers are often making installment payments for a period of years after the sale.
By planning in advance, a middle market business owner can think about which exit strategy will lead to the most rewarding result. If an insider transaction is the chosen path, then making sure the right people are in place is just the first step. Training and rewarding them to be leaders and ultimately owners are the keys to achieving your goals.
