Question: Should You Sell Your Business to a Key Employee or a Group of Key Employees?
Sell to employees only if their purchase price matches or exceeds what a third party would pay. The most significant disadvantage of selling to employees is MONEY. Best employees don’t equate to the most successful entrepreneurs.
There are advantages as well as disadvantages when selling your business to a key employee or a group of key employees. As the business owner, you know the capability of the potential owner(s) because they are your current employees. You can anticipate how the business will run after you leave. The potential buyer (your key employee or group of key employees) already knows and understands the inner workings of the business because they have been working for you for some time now. You will likely have greater flexibility in defining your role, if any, as a consultant to the buyer after the sale is completed.
Disadvantages include things like: Do your existing employees have or can they access sufficient cash to pay you 100 percent (or a substantial portion) of the purchase price? If your employees cannot and an outside third-party buyer can, it may be smart to consider the third-party buyer. If you do sell to your employee’s and must carry a substantial portion of the purchase price in the form of a promissory note, then your real worries have just begun. If you must carry back some portion of the purchase price, make sure that as a subordinate creditor to the senior lender, you have negotiated as much security for your note as possible.
Another risk is that even though your employees and your management team may be considered your “best employees” that doesn’t mean they are the “most successful entrepreneur.” Employees are employees for a reason; that reason is that they are comfortable letting you the business owner & entrepreneur assume all the risk. When these risks shift to their shoulders, they may not be able to perform, so you must evaluate your employee’s entrepreneurial instincts without a clouded judgment.
Remember if there are potential buyers other than your employees, carefully weigh each option, each type of buyer and decide which buyer best serves your long-term retirement and family interest. When deciding to sell to employees, make your decision for the right reason.
Sales to employees are possible and even profitable IF you can meet two conditions:
1. You must have at least five to seven years left between your decision to attempt a sale to your employees and the moment you plan to leave your company.
2. You must have a skilled set of advisors who have experience in orchestrating the planning necessary to make this type of sale successful.
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* This information is for general purposes only and is not intended to constitute any specific legal advice of any type.