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Fulton Bank

How to sell your business to employees

Selling your business to your partners, management team or employees can be an attractive option to consider. Current employees know the business and have an interest in seeing it prosper. As well, customers, suppliers and investors may be reassured by the stability this option offers. You might also like the idea of trusting your business legacy to people you know well.

If you’ve worked in the business a long time and seen it grow and prosper due to the graft you’ve put in, you’ll care about what happens to it after you sell it. If you can sell it to a trusted employee, they’re more likely to maintain the existing company culture and run the business in a manner similar to yours, especially if they’ve been with you a long time.

Selling to an employee also means:

  • Less hassle, because you’re not selling the virtues of your business to a prospective buyer. Employees already know your business, and if you offer them the chance to buy it, that’s a whole lot of time you don’t have to spend on the charm factor.
  • You’ll experience a smoother transition, because the other employees, suppliers and customers will already know the new owner. It also means you might not have to stay around for as long as you would if you were selling to someone outside the business, because the new owner won’t need to be trained as extensively.
  • While there are many benefits to selling to an employee, there are some drawbacks. For instance, it’s not uncommon for the sale price to be lower than what you might have got if you’d put the company on the market. In fact, the employee might not have enough capital to swing the deal on their own, meaning that you might be involved in helping them fund the purchase.

The selling process

In most cases, selling your business to an employee will follow a common path. The steps usually include:

  • You and your employee agree on a sale price. Remember that an employee may feel entitled to a discount because they work there. You might feel the same way, but it’s still important to remember that an outside buyer would probably pay more. Keep that in mind when setting the price.
  • A valuation of the business confirms the agreed price. This is an essential step, especially if there’s some dissention over what you want to sell it for and what they want to pay.
  • Employees probably won’t have the capital to buy your business outright, which means they’ll need to borrow the remainder. You might be financing part of the deal, in which case you need to feel confident your employees can run the business well enough to pay the rest of your money.
  • Draft the shareholder agreement to transfer ownership. It’s really important to have this done by the business’s attorney and should be reviewed by the employee’s attorney.

Each stage of the process should be overseen by professionals.

Employee Stock Ownership Plan (ESOP)

This method allows a business owner to sell the business to all qualified employees instead of a single buyer. Often ESOPs are part of an employee’s perks, where they receive a stake in the business as part of their contract. The shares are held in trust until they leave.

There are two basic ways ESOPs work when the owner is selling the business:

1. The employees contribute to the ESOP fund, which is then used to purchase the owner’s shares over time. In some cases, the ESOP can be funded through commercial financing, reducing the amount of time it takes for the seller to receive proceeds from the sale.

2. The ESOP is funded through the seller, which is more common. Essentially, the ESOP buys all of the owner's shares at one time and pays the seller for the shares with a note that yields a healthy interest rate. Ownership of the company transfers to the employees and the seller receives the sale price plus interest.

Of course, an ESOP needs to be part of the business from an early stage, it’s not something that can be implemented at the time the owner wants to sell.

Preparing the employee to take over

Once all the i’s have been dotted and t’s crossed, it’s time to begin the transition process. How long this takes depends on the level of experience and knowledge your employee already possesses. If you’ve been mentoring them for a long time, they’ll have the necessary skills and experience to take over with a minimum of training.

Summary

Selling your business to an employee is a great way to ensure it stays in capable hands and continues to run along the lines that you specified from the beginning. It’s easier on your other employees, as they don’t have to get to know anyone new. The same goes for your customers and suppliers. You might not get the same price as you would on the open market, but that’s something you should balance against the benefits of selling to an employee you trust. 

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