So you Want to Sell your Business to your Employee(s)

I’m often involved in exit planning and the execution of the finished plans as part of my CFO duties. I’m here now to give you a preliminary checklist to keep in mind if you really want to sell your company to employees, although also keep in mind that doing so is not normally advisable. The reasons for that being employees don’t usually possess the financial resources needed to make a significant enough down payment, or even the credit capacity to assume personal guarantees that may be outstanding. Despite all this, some business owners significantly trust their long-time employees, or want to reward extremely loyal employees, and are willing to assume the additional risks in order to sell their business to them.

Here’s that check list I promised:

• Is the employee/potential buyer on the same skill level as you? Are they capable of thinking like a business owner and not just as an employee?

• What skill sets do you have that will need to be filled when you retire?

• Will your potential new owner be able to fill the need for those skill sets?

• If the answer is no, what is the best means you have to find someone with your skill sets, and should you hire them before you sell or retire in order to break them in, or leave it to your company to sort out after you leave?

• When should your employee/new owner’s closing date be?
The timing is important, and when that date should be depends on many factors such as if you’re selling the business in the slow season or going into peak season. It’s not recommended to sell during the slow season because it gets your new owner off on the wrong foot.

• On a retirement date, is the stock ownership to employees all at once or gradual, and what are the income tax ramifications of either situation?

• How do you transfer personal liability?

• If you want to sell your company to multiple employees, will they make good partners and work well together? If the answer is no, then you probably realize that spells disaster for your company.

• Today, how much is your business worth?

• On your planned retirement date, how much will your business likely be worth then?

• From the business in total, how much money do you need?

• What form can this payment take? Do you need, for instance, a lump sum or would per
year for a number of years you need to specify work for you? It’s likely that you’ll need to take a note for any part of the purchase price, so what is the credit worth of your new owner?

• After retirement, how much money do you need to live on?

• Of that retirement amount, how much must come from the
proceeds of the sale of your business?

Please consider these points carefully if you are seriously considering selling your company to an employee. This list is something I usually hand to my clients who are at the first stages of thinking about selling their company to an employee, as it starts them out thinking in the right direction. Multiple factors not mentioned in this post also need to be considered carefully before diving head first into this process. Make sure that if you’re doing this, you get a team of professionals to help you through.

 

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