There is nothing easy about deciding to sell the company you have poured much of your time and money into over the years. Your business was the center of your life, often coming first over everything else because you are the owner and had to get things done. Now you are ready to sell, enjoy retirement, focus on other businesses you own, or even work for someone else. Whether the decision was difficult or easy to make, you have a lot of work ahead of you.
Next on the list is finding a buyer. He or she could be closer than you think.
Three Benefits of Selling Your Business to Current Employees
Selling your business the traditional way requires hiring a commercial broker. It also means paying this person a handsome commission, which comes directly out of your profits from the transaction. Then you and your broker must heavily advertise the sale, wait for offers, and potentially set a lower price than you would like if buyers do not appear or refuse to pay over a certain amount.
You can skip the hassle and put more money in your own pocket upon exit by selling directly to one or more of your own employees. Let’s face it, many of them secretly think they can do a better job running the company anyway. Now is their chance to prove it. Here are three important benefits to consider as you make this decision:
- Continue the business culture you worked so hard to establish: Every company has a culture and values all its own. People who already work for your business understand this and will be more likely than outsiders to keep these things in place. While it will not be exactly like you left it, the employee-turned-owner has inside knowledge of the inner workings of the business that could be impossible for an outsider to replicate.
- Faster and smoother transition to new ownership: When you sell your company to an employee, other employees, customers, and vendors already know the person and have a better idea of what to expect. You will not need to invest as much time and effort bringing the new business owner up to speed if he or she comes from the inside.
- Spend less time talking up the virtues of your company: Outside buyers may know little to nothing about your business. That means you must spend considerable time and effort educating them and working in salesperson mode to highlight why they should want to own it. This is not necessary with a current employee. An interested employee probably will not need much convincing, so you can just stick to the basics of finalizing the transfer of ownership.
While every business transaction has pros and cons associated with it, the benefits of selling to an employee are worth your serious consideration.
Potential Drawbacks of Selling Your Company to an Existing Employee
It is never a good idea to start broadcasting to your employees that you intend to sell the business until shortly before you are ready to do so. Some may become concerned about the future of your company and start looking for employment elsewhere. Others may feel anxious and less dedicated to their job after a premature announcement. Here are some additional challenges you might face selling to an employee rather than an outside buyer:
- Poor or non-established credit rating: Even if a group of employees wants to buy your business, they will likely need some form of financing to complete the purchase. Unfortunately, not everyone has the credit rating to gain approval for a business loan. This might mean you be tempted to accept a lower price.
- Greater financial risk for you with seller financing: If your prospective employee buyer has insufficient credit, you will need to offer seller financing if you want to go through with the transaction. Not only does this increase your risk, it keeps you involved with the business and does not allow you to fully walk away. It could be several years into the seller financing arrangement before you have that freedom.
Hopefully, the above information provides you with a better understanding of the pros and cons of selling your business to an employee.
Now it is time to look at some practical methods for moving forward with this type of transfer of ownership.
Employee Stock Ownership Plan
Employee stock ownership is a popular benefit among many employers. Known as ESOP, this benefit provides company stock to employees based on their years of service, performance, or other metrics. Long-term employees interested in purchasing the company might have enough stock built up to allow you as the owner to gradually turn over the reins.
There is also the possibility that an interested employee may not have enough stock in the company yet or you want to sell the business as quickly as possible. In this case, the ESOP agreement should allow him or her to apply for a business loan to purchase the rest of the stock necessary to take over ownership. Lenders often look favorably on this arrangement because the loan applicant already has valuable collateral in the form of company stock ownership. Upon approval of the loan, the new owner would make payments to the lender and you can bow out entirely if you wish.
Selling your business through an ESOP also comes with significant tax benefits for the buyer. This is due to the Internal Revenue Service (IRS) viewing ESOPs as a form of retirement savings. The new employee owner can repay the loan with tax-deductible funds that do not require repayment. This prevents the new employee owner from losing profits in loan repayments.
This business acquisition arrangement allows a company owner to transfer majority ownership to top managers of the organization who express interest in taking over as new owners. Because the managers do not have the benefit of employee-owned stock, they must take out a commercial loan. However, commercial lenders often insist that management buyers tap private funding sources first such as taking out a private equity loan or a second mortgage on their home. The management buyout plan also differs from ESOP because the IRS does not make allowances to use tax-deductible funds to make payments towards a business loan.
Despite the advantages of ESOP, it is not the best option for every buyer. Those who purchase a company under management buyout do so because they can change it from a publicly traded to a privately-owned company if that is their preference. Maybe you remember from your own experience of buying a publicly traded company that it involves many costs, complex rules, and never-ending paperwork to finalize the sale. You and your employee buyer could avoid that by opting for a management buyout over a sale involving employee stock ownership. This also relieves him or her of significant administrative burden after officially taking over the company.
Work with Business Asset & Transition Specialists to Sell Your Company
Lewis Hunter founded Hunter & Associates 30 years ago. As a Certified Public Accountant and Business Development Advisor, Lewis has worked with thousands of small and mid-sized business owners sell their companies by bringing an investor’s perspective to the table.
He will serve as your advisor and point of contact for every phase of the transition. Please contact the Jacksonville office of Hunter & Associates today at 904.571.7471 or complete a contact form to receive a prompt callback.