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The Pros and Cons of Selling to Employee(s)

Posted by Zinner & Co. on May 28, 2019 6:44:00 AM
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If you’re planning on selling your business, one potential market is your current employees. They understand the business and how it runs. They have some sense of the value, or potential value of the business. But before you offer to sell to your employees, pros and cons of selling to employeesyou should know the pros and cons of taking that route.

Like any transaction, there are pros and cons inherent in selling to your employees. Here are a few key factors to consider:

PROS

  • It’s a ready-made market – Someone who understands your clients, your operations and how things are done is instantly a potential buyer. Selling a business can be a long, time-consuming and costly affair. Selling to employees can reduce the cost and greatly compress the time of the sales cycle.
  • It can make for a cleaner break – Employees know your clients, products and services, and will require less hand-holding and have a much shorter learning curve. If your desire to leave the business is pressing, this may be your best option.
  • It may keep the company out of the hands of your competitors – If your competition is an arch enemy, selling to your employees may be the best way to keep the company you’ve built from falling into the hands of a rival.
  • Cement your legacy – If your business is important to you or the community you serve, selling to employees may help keep the legacy you’ve built continuing long after you’ve exited.
  • It may be less painful than selling to a stranger – It’s hard to not get emotional when you think of selling your business. You’ve put your blood, sweat and tears into it, and you hate to see it go. Employees who have worked for and with you can take some of the sting out of the process.

CONS

  • They may expect a lower price – Your employees may feel entitled to buy the business at a discounted rate because of their role in the company. They may try to use their friendship to secure more favorable pricing and terms.
  • If their effort to buy fails, it may damage the company’s value – If employees are unable to successfully secure financing and the deal falls through, there may be hard feelings. Your employees may adopt an “if I can’t have it, no one can” mentality and try to sabotage other efforts to sell.
  • If the business fails your employees and customers may have bad feelings towards you – If you sell and the business subsequently fails, your former employees and customers may resent you for selling.
  • Seller-financing may bite you – If you sell to an employee and agree to offer seller-financing because of your relationship with the employee, their ability to keep the business viable may bite you. This may leave you in a position where you have to take the business back in far worse position than when you sold it.

Selling a business can be a daunting task, and it's never too early to begin planning your exit strategy. Before jumping into anything, carefully consider your options. Weigh the pros and cons. A well thought-out departure and transition plan can increase the odds that your business will succeed after you step away.

If you need help determining a valuation for your business or determining your best course of action selling your business, contact a Zinner professionals.

Topics: transaction advisory, Business - Management, Issues & Concerns, SMB

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