You’ve been thinking about selling your business for a while, maybe you’ve even had preliminary discussions with a Business Broker or Mergers and Acquisitions advisor. But you have one nagging concern - wouldn’t it be easier to sell your business to a trusted manager or key employee, or even to a group of employees? And wouldn’t it be the right thing to do? After all, these are the people who helped you build your business into what it is today. Shouldn’t they be rewarded for their loyalty?
In an ideal world, the answer would be “yes”. But in that “ideal” world, employees would have large savings and perfect credit, spouses would be willing to guarantee notes and place liens against their homes, and employees would have the commitment, motivation and risk tolerance of business owners.
But it’s not an “ideal” world – it’s the real world. In the real world, employees don’t have large savings or perfect credit, spouses aren’t willing to put their homes on the line as collateral and employees are employees for a reason – not everyone is cut out to be an entrepreneur. And banks don’t make loans to unqualified buyers.
In the real world, unless you are willing to personally lend the employees the bulk of the sales price, the answer to the question “should I offer my business to my key employees when I’m ready to sell” has to be “no”. It’s not in your interest – and it’s not even in your employees’ interest:
Employees Typically Won’t Qualify for Financing
Despite the best intentions of the owners and employees, in all likelihood, your employees just won’t qualify for a loan. They don’t have the required down payment, high enough credit scores, sufficient collateral, or business ownership experience. And then there is the squabbling – employee “A” has 50% more equity in his home than employee “B”, isn’t it fair that he get a bigger share?, employee “C” had a personal bankruptcy and employee “D”s spouse won’t co-sign. The infighting won’t stop.
Fear of the Unknown
The employees can’t qualify to buy the business themselves, but now they know you are planning to sell. What will the new owner be like? Will he want to keep them on or are they going to lose their jobs? Fear of the unknown is a normal human response. Even though new owners virtually always want everyone to stay, if your employees learn about a sale before they can meet the new owners, they may decide that the best way of dealing with the uncertainty is to start looking for a new job. By offering the business to your employees, you’ve let the cat out of the bag, and it won’t go back in. It’s best for everyone not to inform employees about a sale until after it is consummated.
“Blackmail” or “Veto” Power
It’s one thing to be told that the business you work in has been sold and that the new owners would like to keep you on. Most employees would feel surprise and then relief that their job was secure. It’s quite another thing to be offered a chance to buy your company – to have a chance at the American dream of owning your own business – and then have that chance evaporate when you are turned down for financing. And then, to add insult to injury, have the business sold to an outsider. Now the employee doesn’t feel relieved, he feels envious. We’ve seen instances where envious employees have tried to derail a sale, either by getting together and “vetoing” a prospective buyer (by vowing not cooperate with someone they didn’t approve of) or by demanding a “bonus” (really blackmail) to sign up with the new owner. All because they were offered something they shouldn’t have been offered in the first place.
If you’ve been thinking about selling your business, it’s best to get professional advice before you make the kind of misstep that could put the successful sale of your company in jeopardy. To learn how to avoid these major mistakes click here or click on the button below or call us at 240 290-5000 and we’ll map out the steps you need to achieve the highest possible market price for your business.
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