Business Valuation | Succession Planning

Pros & Cons of Selling Your Business to Your Employees

Pros & Cons of Selling Your Business to Your Employees

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As a business owner, a vital component of your strategic plan is your exit strategy. When it comes time to part ways with your business, many owners face the same dilemma: Who is the best person to sell the business to?

While there are several options, owners typically consider selling the business to an employee. In fact, 30% of all business owners plan to transition or sell their business to key employee(s) or family members.

After investing years of hard work and energy into your business, leaving it in the hands of people who are familiar to you may seem like the most comfortable option. But, this option may not be the best for everyone, or every business.

As you begin to consider who is the best person to take over ownership of your business, consider weighing the following pros and cons of selling to a key employee:

PROS:

  • Familiarity: Your chosen employee is already familiar with the business and the customers. If you are aware this change is coming, you will have time to acquaint your candidate with the business and all of its in-depth mechanics. This also helps to maintain relationships with customers, vendors and employees, as the candidate’s process of doing things will most likely remain consistent with those you previously set in place. A sense of familiarity in the wake of your absence will keep the transition from any drastic changes as you exit.
  • Faster Sale: Finding a buyer to take over your business can be tedious, and the time it may take to finalize the sale can present significant challenges. Even after finding a buyer, it may be necessary for you to oversee additional training. Selling to an employee ensures a much shorter sales process, which means a more clean-cut break for you.
  • Continuing a Legacy: As a business owner, you have created a name and an image for yourself and your business. After dedicated years to your company, it is only natural to care about the continuation of the business. Handing over the company to an employee will likely lead to continuity in the business’ culture and values. Depending on how long your company has been around and how loyal your employees have been to your business, this also ensures prior staff will remain employed.

CONS:

  • Finances: Depending on the type of business you own, your employees may not have the finances required to make a large-scale purchase. You may therefore be forced to accept a lower price for your company than you would receive in the open market. It could also lead you to seek other alternatives, ultimately leaving you intertwined in the business for longer than you first envisioned.
  • A Different Type of Responsibility: Although your employee may excel in his or her previous position, running a business is a whole different ballgame. If your employee has never had experience with this level of responsibility, they may not realize the extent of their new responsibilities. Learning the obligations of ownership is a process that’s riddled with moments of failure. As a professional who has been down this road before, you must decide if your company can handle being managed by someone who is relatively unexperienced.
  • Obligation: Selling to an employee may leave you with a sense of attachment to the business. For some owners, letting go of a business is bittersweet; for others, it’s a natural, expected progression. When selling to an employee, you have to analyze the type of relationship you have with them. This includes the obligation you may feel to help them or, worse, the entitlement they may feel toward your help. If “washing your hands” of the business is the approach you have in mind, it may not be in your best interest to sell your business to an employee.

Your exit strategy is a crucial part of your strategic plan. To avoid running into difficult roadblocks as you transition, you should draft your exit strategy sooner rather than later. In the long run, being proactive about your exit strategy could save you from making a wrong decision.

The Legacy Advisors Network team is here to help you decide who the best candidate is to buy out your business. Contact our team of experienced advisors to learn more by visiting www.legacyadvisorsnetwork.com.

 

Categories : Business Insights