The Pros and Cons of Selling Your Business to Employees
Owners considering exiting their business juggle several aspects of exit planning, from identifying the company’s value, getting financials in order, streamlining business operations, and negotiating the selling price to finalizing the deal. Business owners have their hands full, trying to manage all the facets of their exit plan, but the most crucial detail is identifying whom to sell their business to. Should they consider selling the company to an outside buyer, like a business competitor? Should they keep it in the family? Or should they sell the business to key employees?
Selling the business to employees is not feasible for all business owners. Sometimes the company doesn’t have employees capable or willing to take over the company; other times, financial considerations and the owner’s exit goals prevent a transaction. Under the right circumstances, however, selling to employees has several benefits.
Being an integral part of the company, employees play a crucial role in your success. Business owners often choose to sell their business to those key employees who are willing to run it and capable of doing so. Known as an employee stock ownership plan (ESOP), this exit strategy is an attractive option for business owners because of significant tax advantages, business continuity, and the owner’s legacy goal. Selling to employees also facilitates the retention of key employees, higher productivity, and company growth.
Before forging ahead, business owners should conduct a thorough analysis of the company’s current state and answer the following;
- Is the sale to employees a possible exit option?
- Is ESOP a good strategy for business ownership?
- What value can you expect to receive?
- Do you have an ESOP structure for your company?
- How will you finance this business transaction?
- What are the tax implications of this exit strategy?
Let’s weigh the pros and cons of selling the business to key employees.
Selling Your Business to Employees: Pros
Familiarity and Ownership
Employees already know the company’s inner workings because they are its backbone. They are already familiar with the industry, operations, and customers. They have critical insights into the business’s in-depth mechanisms and existing relations with vendors and clients.
This familiarity means owners know their exit will not disrupt the business operation, and processes are more likely to remain consistent. They are also aware that employees-turned-owners feel differently about the company, their jobs, roles, and responsibilities, making them work more efficiently because they are now working for themselves. As a result, the chances of the business being even more successful in the future are high.
One such successful business is Publix Super Markets, Inc. Founded in 1930, the company is the largest employee-owned company in the US today. Publix is also the fifth-largest privately held company, with 1,272 store locations and approximately 225,000 employees. All Publix employees, regardless of their position, receive company stock after completing 12 months on the job.
Employee owners are more accountable for their performance and their colleagues, as they all have a stake in the company.
Selling your business involves considering multiple factors, such as the right time to sell, whether to use an advisory team, how to maximize business value, and how to look for the right buyer. All these aspects are time-consuming. Once you find the ideal buyer, it also takes time to complete due diligence. If the deal goes through, the business transition may require you to stay involved in the business for the unforeseeable future.
But when you sell the business to employees, the transition is smoother and faster for everyone. The new owners are already aware of the business processes, vendors, and customers. The exiting owner may make a clean break from running the business rather than staying on board to provide support and training to the new owners.
Business Legacy Continuation
Buyers’ remorse is terrible, but the seller’s regret may be even worse. Often business owners regret selling their businesses after closing the deal. And sometimes, owners regret their decision despite getting the maximum selling price, primarily due to their inability to address the succession and legacy issues.
After dedicating years to building the company and its culture and values, owners worry that their corporate legacy won’t continue after they leave. When you hand over the company’s reins to your most trusted employees, chances are greater that your business values and company culture will continue.
Selling Business to Employees: Cons
Lower Purchase Price
Employees may not have access to the finances or the credit needed to make a large-scale, commercial purchase. As a result, the owner may have to accept a lower price than they would have gotten otherwise.
Lack of Preparedness to Run the Business
Running a business is a different ball game than merely working three. It entails a different and higher level of responsibility, skill, and accountability. Unfortunately, most employees are caught unaware and struggle to cope.
Employees who have no prior experience running a company may find the challenge of business ownership exceeds their expectations and capabilities. As a business owner, it is necessary to select the right employees to manage the company once you retire.
Owners Feel Obligated to Help After the Sale
Most owners are very attached to their businesses. Even though they may be prepared for the change and transition, letting go is a bittersweet experience.
When you sell your business to employees, it’s essential to understand and analyze your existing relationship with them. You may feel obligated to provide guidance, extending your involvement in the company. That may conflict with your exit goal to move away from work and focus on other personal goals.
Owners considering selling the businesses to their employees should work with experienced advisors skilled in designing and executing this ownership transfer type. Connect with our advisory team to know more.