Would you sell your small business to an employee? Could your employees lead your business? These are important questions to consider as you build your succession plan.
Many small business owners choose to sell their businesses to the people who know their procedures, market, and strategies intimately. Why? Because their hand-selected team already has the know-how, skill, and experience to keep the business up and running.
Your best employees know the strengths and weaknesses of your business’s operations. Plus, they probably have realistic ideas of what can be done to address problems and go after new opportunities. Some of your high-performing employees may be interested in growing, learning, and taking on bigger responsibilities. Some may even be up for the task of ensuring that the business they’ve labored in lives on.
Can my employees afford to buy my business?
This is a question many business owners ask. However, it matters far less that your employees have the cash that’s needed to buy the business than that they can access cash to do so.
There are several resources your employees can use to cover the purchase price. Here are three that are most common:
In the United States, the Small Business Administration (SBA) offers loans to cover the upfront costs of buying a business. These loans have relatively easy-to-meet qualifications. These include a credit score of at least 640 and an ability to make a down payment (often set at 10 percent of the purchase price).
Interested buyers can visit SBA.gov to learn more about this program.
Seller financing is a loan that you provide to a buyer to cover a portion of the purchase price. Buyers often use it with other forms of financing, including SBA loans, to afford the full purchase price.
It's easy to see why seller financing appeals to buyers. But it's often a win for sellers, too. With it, you can earn interest on the sale, which can result in a significantly higher payout. You might also defer some tax liabilities to future years, which can result in tax savings.
To learn more about seller financing and how it can benefit both you and potential buyers, check out this article:
Employee stock ownership plans
Another option is to establish an employee stock ownership plan (ESOP). This plan enables your employees to buy or be gifted shares of your business under specific terms. To form an ESOP, you'll work with an attorney to set up a trust fund for your employees, and you'll allocate shares to individual employee accounts. When you’re ready to exit your business, other shareholders can buy your shares at fair market value.
There are tax advantages for businesses that participate in ESOP plans. Dividends, contributions of stock, contributions of cash, and contributions used to replace a loan that an ESOP takes out to buy existing shares are all tax-deductible, for instance.
But there are some caveats you should keep in mind before setting up an ESOP plan. First, it’s important to recognize that ESOPs are not an option for partnerships, and there are limitations to how they can be used in S corporations. Second, the cost of establishing an ESOP can be high (often $40,000 or more). And finally, new issuances of shares will dilute the stock of existing shareholders.
Speak with an attorney to find out whether your business can establish an ESOP and whether it makes sense for the context of your business. You can click the buttons below to connect with an attorney or ESOP advisor:
There are other options for financing your employees could consider, too. These include asset-backed financing, using retirement plan savings, and arranging a lease-to-buy agreement that helps them to save up for the full costs of ownership.
Are my employees up for the task of ownership?
The best way to determine their interest is to have a frank, open discussion. Think about telling an employee or your employees collectively that you want to sell your small business, but keep in mind that there are some risks to disclosing your plans. Our guide, Confidentiality and the Sale of Your Business, can help you weigh the benefits and risks of sharing your news with your employees and inquiring about their interest in ownership.
Whether you decide to sell to an employee or to others, you’ll need to form an exit team who can help you make your small business sale a success:
|Hire an accountant to help you to prepare the financials your buyers will need to see to assess your business and attain funding.|
|Meet with a valuation specialist to determine a fair asking price for the real estate, assets, and inventory of your business.|
|Retain a lawyer to help you draft a non-disclosure agreement (NDA), review offers, and negotiate terms.|
Would you like us to help you find your team to sell your small business to an employee, another business, or an investor? Use the search tool at the bottom of the page to get started.
With your team in place, you can begin the process of preparing your business for sale, finding buyers, navigating offers, and negotiating a fair price for the business you’ve worked hard to build. We can help you with every step of this process. Log into your owner’s portal for step-by-step checklists, articles, and advice you can use to make your sale a success.