Planning to Sell Your Business to Key Employees?

It’s a common route for those moving on from business ownership, and even though it can be rewarding, it can also come with some “baggage.” Follow these important steps.

A business owner has lunch at her desk at the office with two of her employees.
(Image credit: Getty Images)

If you’re a business owner considering an exit, following some sequential steps may keep your blood pressure in check during an otherwise stressful period in your life. Consider the following as a compass that can help you get to the proverbial finish line and create the more balanced and holistic life you might be envisioning.

Be Clear on Why You Are Selling

Your “why” could be any number of reasons. You want to retire. The industry is evolving quicker than you prefer. You’ve experienced a disability or divorce. Maybe you need the cash, or you’ve just lost the desire to own a business that comes with challenges and complexities.

Identify Your Buyer

Who you decide to sell to is an important, meaningful consideration that requires ample thought. For our purposes, we are assuming a sale to key employees, but I would be remiss if I didn’t mention that some other common paths include selling to family members, partners, employees (ESOP) or to an outside third party.

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Get Professional, Independent Valuation

Your idea of what your business is worth might be different than what it’s worth to a buyer. The worth of just about anything proves to be what someone is willing to pay for it. As a one-off example, let’s consider a professional athlete being traded to another team for several other players and draft picks (think Herschel Walker). Don’t tell the Dallas Cowboys that their star running back wasn’t worth what they received from the Minnesota Vikings. They proved it to be true in the marketplace.

Back to your business, the selling price isn’t purely based on valuation. Certain buyers may see greater opportunity and have different paths they envision than others will. Still, a professional valuation is a good starting point.

Determine the Structure of the Sale

When selling to key employees, an installment sale is common. If the business is stable, has steady cash flows, has good management and staff along with consistent processes, selling on an installment basis can make good sense. The owner and buyer(s) agree on the company’s value.

The prior owner would typically hold a promissory note with installment payments over a specific time with interest. The note is typically secured by the assets and stock of the business, along with the personal guarantee and collateral of the buyers.

Financing the Sale

Your employees do not typically have the liquidity or financing available for a lump sum purchase of your business. This can often lead to selling for less in comparison to other buyers.

Messaging

To avoid the rumor mill, you might consider contacting your best customers, suppliers and vendors via phone or an in-person meeting. This might sound like a daunting task, but it’s well worth the time. You might include your buyers in these conversations too. Providing a consistent message can instill confidence that the business will be in good hands and will not miss a step during the transition.

Separately, a meeting of similar objective should be had with all employees not involved in the purchase. This too can offer reassurance and confidence that a change in ownership does not mean their jobs are at risk or that the business is changing operationally in any material way.

Be Flexible (a Little)

Given that there is a relationship between you and your key people, there is a chance they could try to leverage that relationship for some lenience should financial challenges arise during the installment sale. Sometimes a need to restructure the terms is in the best interest of all parties involved.

In the End

Selling to your key people can be a rewarding experience. You likely share the same values, have similar work ethics and share a similar vision for the business. After all, that’s what made them “key” to begin with. To play an integral part in them becoming business owners and the positives that can come from that for themselves and their families can almost feel like another form of payment from them to your heart.

Branch address: 139 Genesee St., New Hartford, NY. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Chris Giambrone is a co-founder of CG Capital (opens in new tab)™, a boutique wealth management firm based in New Hartford, N.Y.  He is a CERTIFIED FINANCIAL PLANNER™ and Accredited Investment Fiduciary® (AIF®). Chris has also earned a Certificate in Retirement Planning from the Wharton School of Finance at the University of Pennsylvania.