Is Selling Your Business to Your Employees a Good Idea?

Posted on Fri, Aug 07, 2020

Is Selling Your Business to Your Employees a Good Idea?

Many small to midsize businesses have long-term employees who know the business through and through. They have grown in their roles as the business has grown. They know the business’s strengths and weaknesses, the employees and the clients. When a business owner decides it’s time to exit, selling the business to key employees may seem like the obvious choice. But, is selling your business to your employees really a good idea?

Confidentiality Is Critical

Business owners contemplating an exit should keep their intentions under wraps until the sale is completed. Telling employees too soon can foul the deal from the start. Employees who know their boss is selling may lose confidence and begin to look for other jobs. Rumors about the business’s viability may begin to circulate, and the business could lose customers and creditors. So, unless you are certain you can have discussions with key employees in total confidence, its best to keep the fact that you are selling confidential and find an outside buyer. Professional business brokerage firms can advise you on the wisdom of selling to an outside buyer, and they can also help you manage the process successfully if you do decide to sell your business to your employees.

Financing May Be an Issue

If you need to walk away from a business sale with the all, or almost all, of the purchase price in your hands, selling your business to your employees may not be a great option. Employees almost never have enough available capital to pay cash at closing, and often won’t qualify for a business acquisition loans. You may find that the only way you can sell to your employees is if you provide the bulk of the financing yourself. And, if you are counting on the proceeds of your sale to fund your retirement, this may not be a risk that’s worth taking. Better to let your business broker take the risk out of selling by matching your business with a well-capitalized buyer who can cash you out at closing.

Your Vision for Your Business After the Sale

When you have put your heart and soul into building a business, you may find letting go difficult. If you have a strong management team who believes in the business, selling to employees can offer you a way to thank them for their devotion, and be a way maintain your legacy (your employees might even keep your picture on the wall!). You may have to provide the financing yourself, but you can minimize the risk if you are willing to work for the company after the sale for a few years. In this way, you can continue your stewardship of your company and ensure that there are enough profits to comfortably pay off your note.

If, on the other hand, you don’t want to risk not receiving the full purchase price and/or you are not interested in working for your company after the sale, then selling to your employees is not for you. In either case, working with a professional business broker will help you determine your best course of action and help you achieve your goals in the sale.