As a Part Time CFO I often get involved in exit planning and executing exit plans. The purpose of this post is to give you a preliminary check list when selling your company to employees. Generally it is normally not advisable to sell your business to employees. The reasons are that employees usually do not have the financial resources to make a significant down payment nor do they have the credit capacity to assume personal guarantees that may be outstanding. However some business owners who have significant trust in employees they have employed for years or want to reward employees that have been loyal for years really do want to sell the business to these employees and are willing to assume the additional risks.
Below is a preliminary check list to consider when selling your company to employees:
• Does the potential employee buyer or buyers have as much skill
as you do? Do they think like business owners or do they think
• When you retire, what skill sets that you brought to the table
in the day to day running of the business need to be filled?
• Will the new employee Owner(s) have those skills sets?
• If not, what is the best way of finding someone who has the
required skills and should they be hired before the sale or your
retirement date to break them in?
• When should the closing date be of the new employee owner(s)?
Timing is important. For example are you selling the business
going into peak season or going into the slow season? If you
are selling into the slow season this may bet the new employee
owner(s) off on the wrong foot.
• Does the stock ownership to employees become gradual or all at
once on a retirement date and what are the income tax
ramifications of each?
• How does personal liability get transferred?
• If multiple employee owners will they work well together and
make good partners? If not, that could spell disaster.
• How much is your business worth today?
• How much will the business likely be worth at your planned
• How much money do you need from the business in total?
• What form can this payment take? For example, lump sum or per
year for how many years. If you need to take a note for any
part of the purchase price which is a likelihood what is the
credit worthiness of these new owner employee(s)?
• How much money do you need to live on after retirement?
• What portion of that retirement amount must come from the
proceeds of the sale of your business?
As previously mentioned this is a preliminary list to think about and consider. As a CFO I usually hand this list to the business owner when they are contemplating selling to an employee as this list gets them thinking in the right direction. There are many other factors that need to be carefully considered about your specific situation. Make sure you have a team of professionals helping you.