Is it time for an owner to think about selling the business? The process from determining the values of a business, preparing financials, improving business profits and operations to increase business value, and negotiating and finalizing a deal can be a tiresome and daunting process. An important step in the process for an owner is determining who it is they want to sell it to. Should they sell it to an outside buyer like a competitor? Or should it be kept in the work family by selling the business to employees? While both options have their benefits and drawbacks, today, we are going to look closer at why an owner should or should not sell a business to an employee.
Pros of selling to employees
Business owners grow an attachment to their company and have a sense of loyalty to employees. They want to see the employees maintain a role in the company once it’s sold. Selling to employees not only promotes business continuity, but also rewards employees who helped build the company. This helps ensure that the owner’s legacy will remain intact. An employee sale can provide a longer period for a business to build value. This provides the seller with a greater return if the value of the business does not currently support the owner’s retirement needs. Transfers can also be structured to allow the owners to abandon selling the business to an employee and instead sell to an outside buyer if it is believed the employee cannot successfully manage the business. While there are several advantages to selling a business to an employee, there are disadvantages as well.
Cons of selling to employees
It can be hard to find outside buyers for a business. The outside buyer may just want the business’ customer list, facilities, technology, or to take a competitor out of the market. Employees are unlikely to have the funds needed to buy the business fully. External financing will be required, and the owner will likely need to be involved in the whole process. There is also a risk an employee will expect a lower selling price because they believe the business would not have been as successful without them and as a reward for remaining loyal. An employee making an unacceptable purchase offer, failing to secure external financing, or the deal just falling through will leave the owner in an awkward position.
While selling a business to employees comes with several benefits there are also several drawbacks that need to be considered beforehand. At the end of the day, do the benefits outweigh the drawbacks?