Setting the Rules
Structuring a transaction through an employee buyout should accomplish the same objective as selling to an outside buyer. Your objective is to structure a sale that maximizes value while minimizing risk (tax consequences included). If an employee group can fulfill that objective, the offer is worth considering; if not, look elsewhere.
The Pros and Cons
There are advantages to selling to employees including the following:
- You know your employees, their strengths and abilities, their integrity, and determination.
- You also have a good idea how the business will be run in your absence given your employee’s skill set.
- There is no question that the buyer (employees) understands the business.
- If you want to be involved in a decreasing capacity, your employees will be flexible.
There are also distinct disadvantages including the following:
- Money. Of course, employees would like to put little or nothing down, have you carry the entire purchase, and pay monthly payments. Don’t fall into that money pit. With SBA financing, home equity financing, and cash equity, buyers should be able to finance 80 – 90% or more of the acquisition. That translates into minimizing your risk substantially. Most buyers, employees or otherwise, want the seller to provide some financing. If you require 100% down, you likely will compromise maximizing value.
The problem with financing an employee buyout is that bumps in the economy, difficulties with receivables, and normal cycles in the course of business will be seen by employees as periods when they just can’t meet the monthly promissory note. They will expect you to “understand”, and wait until their cash flows turn around. If you are carrying a seller note with the employees, suddenly you’ve become the bank. Better to remove most of your cash from the table with a qualified buyer, than to wonder if the employees will ever resolve the note you are carrying.
- An additional risk is the employees themselves. Although you do know their strengths and weaknesses, don’t forget that they are employees. Crossing the line from “employee” to “entrepreneur” is a substantive leap. In other words, great employees don’t always translate into great entrepreneurs.
Bottom line is that if your employees have the cash and financing to buy your company, let them. If not, consider the risk, and whether or not you want to retire with your risk left on the table, or taken off.
Bradley G. Marlor MBA, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary with the International Business Brokers Association. Utah Business Consultants is a full-service Business Brokerage and Valuation firm. He can be reached at email@example.com.