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Selling Your Business To One Of Your Employees: Pros And Cons

Selling Your Business To One Of Your Employees

As a small business owner, an exit strategy should be a part of your strategic plan from day one. The key to being able to successfully sell your business is to establish a company that can run without you.

If you keep this in mind from the start, you can build the business accordingly.

As I am sure you know there are many options to consider when deciding how you are going to sell your business. Some people choose to sell it on the open market while others take a more personal approach like passing it on to family.

After investing years of time and talent into a company, many small business owners want to feel like they are leaving their business in good hands and for that reason, some sellers opt to sell their business to an employee.

An experienced employee can transition into a great business owner given the right tools and circumstances. If you are planning to sell your business and are wondering if you can sell it to an employee, my answer is yes! However, before you do, let's talk about the pros and cons to taking this route.

PROS

An Employee Will Know Your Business And Your Customers

When a small business is sold on the open market there is typically a need for the transaction to remain confidential until the deal closes.  Owners don’t want to alarm customers and they don't want to see key employees run for the hills!  A benefit to selling your business to an employee is that they already know your company and your customers AND your company and customers already know them!  This can help ease the anxiety that comes along with the sale of a business and help to preserve the relationships it has in place.

This is also helpful when it comes to training and the actual transition of ownership. If you are grooming an employee to buy the business from you, you can pretty much teach them everything they need to know to run the company before a deal is in place. Not only does this help with the transition of ownership but it will also help your employee as the new owner feel confident about their decision to buy the business.    

Faster Sale

Selling a small business can take a long time. Not only can it take time to find the right buyer, it also takes time for the buyer to complete a thorough due diligence before they decide if they want to proceed with the purchase.  If the deal closes, you will probably have to provide some sort of training which will require you to stay involved in the company for even longer. This process could take months, even years, depending on your business and its complexity.  When you sell your business to an employee, this process will go much faster as you are able to cut out the whole process of finding the right buyer and training them once the deal closes.

CONS

Employee Credit Concerns

The biggest downfall to selling your business to an employee is that you may have to accept a lower price than you would get if you offered it on the business for sale market.  For one, an employee may not have the cash to finance the deal.  They may also not have the amount of credit built up that they need to finance a large commercial purchase.  With that, if you truly want to sell to them you may have to be willing to accept a lower sale price.

Seller Financing

Because of what I just mentioned above you may also need to offer more seller financing options than you would if you were selling to a third party. By doing this you are taking on more of a risk than you would be if you were working with someone else. Also, offering seller financing keeps you involved with the business to some degree and if you have to finance a good portion of the sale price, it could be years before you actually detached from the company completely and see the benefits of selling your business.

How To Prepare Your Business

The best way to prepare your business is to plan ahead.  As I said earlier, your exit strategy is something you should consider from the moment you buy or start your own business.  Doing this will give you an opportunity to put key employees in place, select the one or ones that you see potential in and groom them to be the next owner.

Peter Siegel, MBAAbout The Author: Peter Siegel, MBA is the Founder & Advisor (ProBuy & ProSell Programs) at BizBen.com and BizBenNetwork. He works with potential business buyers, business sellers, brokers, agents, investors, & advisors. Reach him direct at 866-270-6278 to discuss strategies regarding buying, selling, (or financing a puchase of) small to mid-sized businesses.


Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business



  Helpful Resources To Assist In Selling And Buying California Businesses

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Lee Petsas, Business Broker - Orange, San Diego Counties, Inland Empire

UBI Business Brokers has been successfully selling businesses in Southern California since 1965. Our Agents have over 100 years of experience in selling small to medium size businesses throughout Southern California. We service Orange County, Inland Empire, San Diego. Phone Lee at 714-363-0440.

Brad Steinberg, Broker - Laundromat Specialists

Laundry specialists - founded in 1968 by three laundry professionals, PWS is a family-owned corporation. Through the years it has grown to become the largest vended laundry equipment distributor in the United States. Call Brad Steinberg at 323-721-8832 to sell or buy a coin or card laundromat.


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