Transferring Ownership to a Key Employee
If you are looking to sell your business, you might want to explore transferring ownership to a key employee. When you started your business, you probably never considered the day you would retire, or leave your business in someone else’s hands. A business succession plan is crucial to ensuring a smooth business transfer. Transferring ownership to a key employee can be an attractive option as part of your business succession plan. Peak Business Valuation, business appraiser Utah, can help with business ownership transfers. Below we discuss some of the advantages and disadvantages of transferring your business this way.
Advantages of Transferring Ownership to an Employee
There are several advantages when it comes to transferring your business ownership to a key employee.
Tailor the Transaction to your Needs and Wants
As you look to transfer your business to a key employee, you can tailor the deal to suit your needs and wants. Negotiations tend to be smoother as managers and employees are generally on good terms. There is a level of friendship that exists. Compare this to selling your business to an outside buyer. In this case, there are extensive negotiations and many buyer demands.
Less Training Needed and Smoother Transition
The key employee of your company is often an individual who has contributed to the success of your business. Key employees tend to have a solid understanding of the operations of the business. This allows for a smoother transition of ownership. There is less training time required compared to that of an outside buyer.
Save Money and Time
Finding an outside buyer takes considerable time and money. Transferring ownership to an employee can save you this time and money. If you transfer your business to an employee who already works for you, then you likely won’t need to hire a business broker to assist in the search for a buyer. It can also provide you extra time to plan your exit. Since training will take place before the sale, you have more time if something unpredictable happens to the business.
Provide Continuity for Customers and Team Members
If you have other employees, transferring your business to a key employee or manager helps to provide consistency. Change in ownership can be scary for an employee. The outside buyer might not want to keep all the employees.
Whereas a key employee can help provide some continuity for repeat clients and long term customers. Your long term relationships with clients can be jeopardized when a new buyer comes in. But when a key employee takes over, they will have been around the customers for a long time can help smooth the transition.
Improve Employee Performance
Transferring ownership to a key employee can be an incentive for them to work harder and improve their performance.
Disadvantages of Transferring Ownership to an Employee
There are also a few disadvantages of transferring ownership to a key employee.
Lower Selling Price
If you sell your business to a key employee, you may not receive as high of a sale price. Depending on the structure of the transaction, you may receive little to no cash upfront. The employee may also not be able to make a large purchase, so you may decide on settling for a lower than fair market value for your business.
The key employee may ask for some form of seller financing, which means you might have to delay receiving full payment for the business. This might tie you to the business because you are concerned about being repaid. As such, this could lengthen your time of involvement with the business.
Some transactions are dependent on the cash flow of the business. If the buyer relies upon the future cash flow to make payments, the success of the business is bound by future cash flow. The payments made to you as the owner are dependent on the success of the business.
Continued Investment in the Success of the Company
If you sell your business to a key employee, you might still feel a sense of responsibility to the business. As such, you may feel the need to check up on the employee and the business, which can add undue stress to your life.
Employees are not Always Good Owners
Your key employee might not be a good “business owner.” Many key employees are excellent at their jobs. But being a business owner is completely different. Being a business owner requires learning a new skill set. Your key employee may not be willing, or may not want to go down that path.
Don’t Have a Qualified Employee
It is possible that you may not have a suitable or qualified employee to take the business over. Not all businesses have key employees who run day-to-day operations. As such, transferring ownership to a key employee may not be a viable option. If this is the case, there are other options available for selling your business.
There is no perfect solution for every business and every business owner. For some, it may be selling your business to an outside buyer, and for others, it could be passing it on to your children. Or the answer could be transferring ownership to a key employee. Regardless of the situation, all business owners should consider their options when exiting the business.
Peak Business Valuation, business appraiser Utah, helps with a variety of business ownership transfers on a daily basis. If you have any questions about transferring ownership to a key employee, feel free to reach out to us. We would be happy to help in any way that we can! You can contact us via email or by scheduling your free consultation below!
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