Selling a Business to an Employee

Selling a Business to an Employee

With the ever-increasing volume of businesses for sale, selling to a trusted employee can be a good option for sellers. This is true especially for sellers eager to achieve a faster and smoother exit. Below we discuss the benefits of selling a business to an employee and how to structure this type of transaction.

Benefits of Selling to An Employee

Selling the business to an employee or group of employees has several benefits. However, it isn’t an option for every business owner. Sometimes, a healthy business simply does not have any employees who are willing or capable of taking over. In other cases, financial situations or the seller’s exit plan makes the employee-based sale a no-go.

In the right conditions, selling to an employee can provide several benefits. Especially in the current marketplace where there are more sellers than buyers, selling internally can be helpful.

Business Continuity

As a business owner, you care about what happens to your company after your exit. One of the largest benefits of selling to an employee is that the business operations continue as normal. A family member may be a good option to help maintain the existing culture. But a trusted employee is the next best option. Selling to a trusted employee can help ensure the company continues to operate in a manner that is consistent with the company values and vision. An employee may also have insight into the future value of the business and the passion to carry it on.

Less Hassle Selling

In many circumstances, the seller spends a significant time helping potential buyers understand the value of their company. Since employees are already familiar with the business, this saves time and energy in selling every aspect of the business. An employee who expresses interest in buying your business may already understand the value and potential value of the company.

Smoother & Faster Transition

Transitioning ownership to an employee is often smoother and faster than an outside investor. This is because everyone involved already has a relationship with the new owner. This can include the company’s team, customers, and suppliers.

Before transitioning the business, you will want to spend time training the employee and giving them added leadership responsibilities. This process can take some time but helps guarantee a smooth transition. Once you do sell to the employee you can step away immediately rather than staying on board for a transition period.

Drawbacks of Selling to an Employee

Selling to an employee also has some potential drawbacks. For instance, employee-based transactions often result in a lower selling price than to an outside individual. Employees can also lack the capital to outright purchase the company. This may lead to the seller taking an active role in helping find funding or providing seller financing. Keep in mind an employee will also know the inner workings and dysfunctional aspects of the business. As such they may not think the business is worth as much as you do.

Methods for Financing an Employee Purchase

There are several common methods for financing the sale of a small business to an employee. Below are just a few of the options available.

ESOP

An ESOP is an Employee Stock Ownership Plan. Rather than selling the business to a single employee, an ESOP allows you to transfer ownership of the business to multiple employees. An ESOP is usually a workforce benefit. Employees receive ownership in the business as part of their compensation. The shares of ownership are held until the employee leaves the company. To buy out the owner, an employee can either invest cash in the ESOP trust over time, use commercial financing, or seller financing.

ESOPs are attractive as they have several tax advantages depending on the structure of the transaction. To discover if an ESOP is a potential option for your business, consult with your legal advisor and accountant. Also, consider getting a business valuation performed. A valuation expert will tell you how much your stock is worth and can provide more details about selling these shares.

Commercial Financing

Another option to fund the transaction is through commercial financing. One of the most common ways is through an SBA loan. SBA loans are attractive because of their competitive terms and low-interest rates. To discover other financing options, please read Financing a Business Purchase. Financing the transaction through commercial funding allows the owner to receive the funds from the sale faster.

Seller Financing

In many instances, the best option is to provide seller financing. The seller gives the buyer all the shares of ownership in exchange for a note. This note states what the buyer will pay for the shares including the interest and timeframe of repayment. The ownership of the company then transfers to the employee(s) and the seller receives a monthly payment of the sales price plus interest.

Is Selling to an Employee Right for You?

In today’s overcrowded marketplace, selling to an employee provides a great option for business owners. One of the biggest factors to consider is whether you wish to receive all the sale proceeds upfront. If so, it may be difficult to sell your company to an employee or transfer ownership to an ESOP. However, if you are willing to receive the purchase price over time, selling to an employee may be a faster and smoother move.

Peak Business Valuation, a leading business appraiser in Utah, is here to help small business owners in the selling process. We provide business valuations to help in determining the value of the business, deciding on a listing price, and providing insights into growing the value of your business. Questions are always welcome! Please reach out via email or by scheduling your free consultation below.

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