6 Ways to Sell to Employees

By
Joan Ridley, CFP™, CEPA, CBI

Many of our Baby Boomer clients tell us that they are hoping to sell their businesses to their employees.

Here are some reasons they give:

They want to reward their employees for their loyalty and service
They want to protect and preserve employees and customers
They want to sell “as is” with no pre-sale preparation
They want to remain as employees of the new owner

Let’s take a look at some of the ways you can sell to your employees that you might not have thought of:

1) Employee Cooperative.

Create a Worker Cooperative or Employee Cooperative. This is a little known strategy and is not available in every state. It offers many of the same benefits as an ESOP, but unlike an ESOP, it is not a qualified retirement plan.

2) ESOP (Employee Stock Ownership Plan).

This is a complicated strategy and is not recommended unless your company is qualified based on:

Sustainable increasing revenues
Sustainable increasing cash flow
A well-functioning management team
Number of employees – 20 is a good minimum number
A strong business plan to consistently increase revenues every year
Owner(s) who are comfortable with the complexities of this strategy
Eliminate this strategy unless you are committed to playing by the rules and retaining advisors who are ESOP experts. The penalties for non-compliance are significant, but the benefits are enormous for well-qualified companies and their shareholders. There are significant tax benefits for a C Corp, but can also work well for an S Corp.

3) Voting/Non-voting stock.

Sell non-voting stock to the employees and retain voting stock until you are convinced that the employee(s) are qualified to assume full ownership. This is a strategy to consider when selling to an employee who lacks two year’s industry experience which is required to obtain an SBA guaranteed loan. It is also a strategy to consider when your employee(s) need leadership training.

4) Bonus Program.

Create a current and deferred performance bonus program to help the employee(s) earn the down payment. The bonus program needs to be self-funding and paid only when performance benchmarks are met. Sell the company to the employees when they have mastered all aspects of running the business.

5) Sell now and become an employee.

Be prepared to turn over all ownership responsibilities and privileges, and, to accept a salary that is in line with what they would pay any employee with your new responsibilities and job description.

6) Management Buy-Out.

Consider this strategy if management is interested and qualified to own and run your company, but the employees are not. Management can acquire your company with an outside third party such as a private equity group which provides funds for the acquisition. This can be a good strategy if management has the necessary collateral to fund their interest in the transaction.

Employees are not likely to have the collateral to be able to qualify for bank financing, so be prepared to finance the sale for them. Your risk can be mitigated by providing leadership training and by positioning your company for ownership transition a few years in advance of the sale. Click here to see if your company is well-positioned.

Be sure to protect yourself by insuring the employees in the event the following occurs before your note is fully satisfied such as due to: death, disability, divorce, termination of employment, and any other event that could jeopardize the repayment of your loan. Choose a cash value product with first year cash value build-up.

Before setting out on a course to sell to your employees, be sure your books are in order, and, that all other areas of your business are functioning properly. Employees, like any buyer, want to be certain that the company can support the new loan payments and that they will realize a rate of return on their investment that is commensurate with the risk they are about to take.

Call us at 214-692-9192 to learn more about these and other strategies. We can help you with your plans to transfer ownership to your employees or to an outside third party.

Joan M. Ridley is a Certified Financial Planner™, a Certified Exit Planning Advisor, and a Certified Business Intermediary. Her business consultancy helps business owners improve their top line, bottom line and present their financials to best showcase company performance. When you are ready, we have the conversation about what comes next and what you have to do to get there. Call 214-692-9192 to learn more and visit www.bwsllc.net.