Is it a Risk to Sell Your Business to Your Employees?

By Generational Equity

07/23/2018

A few weeks ago at one of our exit planning conferences, an attendee approached our managing director during a break and thanked us for holding the meeting, but said he wasn’t sure the conference was right for him because he was committed to selling the business to one of his key employees.

Our managing director convinced the business owner to stay for the entire meeting because one of the topics we cover is the downsides of selling a business to your employees.

And he was very glad he stayed because he was not familiar with some of the risks in pursuing this approach when exiting a company.

What are the Dangers of Selling a Business to Employees?

We encounter this line of thinking quite a bit in our business and on the one hand, it is natural to want to thank your key players by offering them the opportunity to acquire your business.

It can be demonstrated as a reward for their efforts in growing the business, and many believe their knowledge of the company’s inner-workings would make them ideal owners.

However, too often the choice to sell a business to employees is an emotional decision made without considering some possible outcomes that frequently crop up later. Here are just a few of the most common issues:

• Often it turns out that the key employee, although great at the role he/she is currently in, does not have the skillset to thrive as CEO.
   
• Sometimes selling to a key employee causes jealous rifts among the entire workforce that impact the company, potentially causing other key people to leave, and significantly affecting the performance of the company.
   
• Since most key employees do not have the capital to fund an acquisition, usually the seller agrees to take a long-term note, which is paid off often over as long as 10 years.

Far too often we encounter business owners who have been impacted by all three of these risk factors. The first two risks you are facing directly impact the performance of the company in the long run, usually creating the true impact of the third risk listed: The key employee (now CEO) stops making payments as agreed because the once great company is now underperforming.

Don’t Make the Mistake of Selling Your Company to the Wrong Buyer

History is littered with business owners who, after selling their business to a key employee, are forced to come out of retirement 4-5 years down the road and try to save the entire enterprise.

This can have a devastating impact on the ex-owner, his/her health, and their family, as well as the financial ramifications, which can be enormous.

We believe that the significant risks associated with this strategy far outweigh any benefit to the current owner (and also the key employee).

In most cases, it is far better to find a third party with deep pockets and experience running a business to sell the company to rather than hope that Larry, who is a great shop foreman, has the aptitude and attitude to be a successful CEO (and really wants to be one).

Especially right now, when we are experiencing one of the strongest seller’s markets in decades, experienced, professional buyers are increasingly active.

This not only helps those interested in exiting their company achieve the maximum value in this competitive market, but find the buyer that will continue and build on the legacy you have created in your business.  Let's face it, for most business owners the emotional goal is to ensure that the company name and its role in the community is preserved post sale.   Selling to a key employee often endangers that.

If you would like to learn more about optimal buyers, including how to find them, negotiate with them and close a deal, then you should attend a Generational Equity exit planning conference.

If you have considered selling the business to a key employee, we strongly encourage you to attend and discover the options available to you.

To learn more about our insightful conference, call us at 972-232-1121, or visit our website and provide us with your contact information and we will be in touch.

And please, before you sell to an employee, carefully research some of the potential negative consequences. It could save you millions when you exit.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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