Article Summary of Is Selling My Business To My Employees A Good Idea:
- 4 Pros of Selling My Business To My Employees
- Cons of Selling to Employees
- The Many Roads to a Successful Sale
Is Selling My Business To My Employees A Good Idea?
I had a business owner ask me the other day “Michael, is selling my business to my employees a good way to go?”
I’ve actually been getting this question a lot lately because the idea of businesses selling to their employees has become a popular topic in the media recently.
Consider these interesting tidbits of information:
- Business owners reported that 11% of their employees went on to start their own business, as reported in the National Small Business Association’s 2017 Year-End Economic Report.
- Your average small business owner reported that at least 1 in 10 of their employees would go on to start a business.
These stats mean that if you have at least 10 employees, then at least one of them is interested in business ownership, and he or she might even go on to start their own business.
If you’re asking yourself, “Is selling my business to my employees a smart deal?” I would say this: the demand is there, but…
Just because the demand is there, should you sell to your employees?
Below is a list of some of the pros and cons I’ve dealt with in my years of buying and selling businesses.
4 Pros of Selling My Business To My Employees
Below are some of the benefits of selling your company to someone within the organization:
- Insiders. Your employees are dedicated to the company. They work hard each day to keep the company running, and therefore understand a great deal about the business. Employees know the business, processes, customers, and most importantly, how to keep everything running smoothly after the business owner leaves.
- Transition. When you sell to trusted insiders, all know what to expect from each other. This can make for a relatively smooth transition, especially since employees understand how to keep the business running.
- Enthusiasm. Employees vested in their company are more committed and engaged than employees without equity. When you make an employee (or group of employees) full owners, they will have a sense of commitment and dedication. This could equate to a good sales price, provided they can raise sufficient capital.
- Flexibility. A management buyout (MBO) or an employee stock ownership plan (ESOP) are two ways to sell to your employees. Depending on how many employees you have, and who is interested in buying, you may be able to structure a deal that works for everyone.
Cons of Selling to Employees
Below are some reasons why selling to your employees may not work out well:
- Success. If you’ve ever promoted an employee, you’ll know that some don’t succeed at the more advanced position. It’s the Peter Principle in action. Good employees won’t necessarily make successful owners. Be careful.
- Capital. Most employees don’t have access to the capital to purchase a business. It’s difficult for many buyers to raise the needed money to purchase a company. Employees rarely have access to the appropriate financing, especially if they’ve never owned any equity or if they’ve never had their own business.
- Under-valued. Your employees see the business from the inside-out every day. They know the good, the bad, and the ugly. This means that an employee may miss-value, or worse under-value, your business given what they know. An external buyer may, therefore, be willing to pay more.
- Stability. Employees, even good ones, can still be shaken by the prospect of a sale. You’ve just told them they might lose their job — at best, that the business is about to undergo major changes. Selling to employees may rock the boat too much, especially for those not involved in the sale.
- Engagement. Only 31% of employees are engaged at work, statistics which come from the 2017 State of the Global Workplace report by Gallup. How can you be sure you’re selling to the employees that are actively interested in your business?
- Expectation. Sometimes a valued employee or successful manager will expect the right of first refusal for the sale of the business. This isn’t usually a problem if you intend to sell to them at first, but can be a problem if you have no interest in selling to the employee or manager.
The bottom line is this: as a great employee does not necessarily a great supervisor make, neither will a good employee become a good business owner.
Many Roads to a Successful Sale
As someone who both buys and operates businesses, I can tell you the best sales don’t usually go to employees. More often than not, some combination of financing and future stability compromises the sale.
If you are committed to selling your business to your employees, try a structured ownership deal. Draw up a contract (or vesting schedule) that requires employees to prove they are running the business well. Assign meaningful targets, like profitability, customer retention, production quotas, or a healthy debt ratio.
My advice is to sell to an experienced professional, an entrepreneur who can run the business well, and who can keep your employees employed for years to come.