Selling Your Business to an Employee
Do you want to sell your business to your employees? Every business owner who has been in business for a long time knows there will be a day when he or she would have to retire. Hence, he or she must have the perfect or a proposed exit plan.
After so many years at your company, owners usually have a solid connection to their business or company, hence, selling out to people outside the company tends to be difficult and is usually one of the hardest decision to make.
In addition to this, there is also a sense of faithfulness to their employees and are concerned with their stay at the company after their retirement or sellout. Of course it is practical for a business owner to want to hand over his or her business to an heir, but when none of the proposed heirs have no interest in the business or are not available to take over the business, the business owner is faced with the challenge of finding out the best exit strategy.
These and so many other reasons make it more beneficial for business owners to sell their businesses to employees.
The question then that comes to mind is, how do I sell a part my business to employees? How do I make sure I do not make mistakes when selling a business to key employees?
Here are some methods you could adopt when selling your share of the business to your employees…
How to Sell Your Business to a Key Employee
If you decide to sell your business to a key employee, then the best method to adopt is the installment sale method. As the name implies, the installment sale is a method of selling your business to your employee where whichever employee you chose to sell your business to, pays in installments for a specific amount of years.
Of course, firstly you have to determine the worth of your company. Next, you need to determine the tax rate because even after you have sold your business to your employees, your company would still pay tax rates and if you are calculating the number of years it will take for the employee to pay for your business fully, then you need to consider the tax rates.
Hence the sale should be designed so that the seller takes capital increases tax treatment. Different things to consider when offering your business for sale through installment sale method are the loan cost assurance, the structure of the agreement on how to pay, contingencies on use of corporate cash, the part of the seller on how to take the business forward and security of the contract made.
Sale of Business Partly as a lease of Assets
Another way to sell your business to your employees is selling it partly as a lease of assets. The assets could be tangible including physical equipment, facilities and customers, or intangible such as trademarks and goodwill.
This method of selling your business to your employees can be adopted when probably your employees do not have enough funds to buy your company. In this method, you sell your business to a group of employees, in an arrangement where the employees are generally protected against prior claims against the business. This method allows employees to make full use and have full control of the business while not having capital tied up in the business.
In this method, what the owner eventually gets rest on how the company executes.
This is another great method to sell your business to employees. It would require the selling your business to employees who are managers or part of the management team in your company. This method can be adopted when the business or company has a trustworthy management team that wants to carry on the business.
The most common form of selling a small business to your employees fast is through an employee stock-ownership plan (ESOP). Although complex, this method of selling your business to your employees has so many advantages. It is one method that helps in rewarding employees and provides a long term incentive for loyalty, hard work and perseverance.
So, how does ESOP work? The owner of the business or the business itself sets up an independent trust. This trust buys the business owner’s stock at a price that will be set by an independent evaluator. The employees therefore hold this stock for as long as they are in the company. When they are about to leave or retire, an employee sells the stock back to the company at an agreed amount.
Selling business to employees under the right conditions can provide lots of benefits including the fact that a trusted employee is the closest thing you have to a family member, the hassle of spending time and energy looking for a buyer and charming them is avoided, and the fact that selling to an employee equals to smoother and faster transition as everyone is familiar with the new owner.