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Should You Sell To An Employee?

> Back to Key Questions

At first glance, a loyal, trusted and effective employee(s) or manager may seem like an ideal buyer.  He or she:

• Knows the business and needs minimal training
• Likely has good relationships with key customers, suppliers and other employees
• Eliminates the need to look for other buyers, reducing the risk of a confidentiality breech
• Would presumably enable a simpler transaction, eliminating the need for intermediaries, attorneys, CPAs and the like
• Satisfies the owner’s desire to reward the employee for long and loyal service.

Seems like a good idea, right?  Wrong, in the vast majority of cases.

Here’s why:

• Very few employees have enough money to invest a significant portion of the purchase price, meaning the owner will have to carry an excessive amount of paper, greatly enhancing the risk and providing little money to invest in another venture or purpose.
• Most employees lack the leadership, management, ambition and risk taking characteristics of an owner.  (Employees with such skills typically leave to start their own business.)  As any owner knows, a profitable business can quickly become unprofitable or even bankrupt under incompetent leadership.
• Virtually all feel they deserve a discounted price, making it harder to reach agreement or reducing the proceeds to the owner.  This belief arise from any number of reasons; e.g.,
1. To reward their years of service (forgetting that they were already paid for that work)
2. They believe the business would be worth much less without them or if they quit
3. Fairness; they don’t have nearly as much money as you.
• If a deal is not reached and you start marketing the business to outsiders, it is quite likely than not the employee will quit, damaging the company at a critical time
• Whenever only one buyer is being pitched, regardless of who the buyer is, the sales prices tends to be lower
• Other employee(s) not participating in the purchase may feel resentment or quit the company.
• All the usual legal documents, disclosures, financial analysis, complex negotiations, etc. that are required in sale to an outside party are also necessary in a sale to an employee.  Given this and above points, it is simply not true that the transaction is any simpler.

Now, obviously there are exceptional employees for which a deal makes sense.  Feel free to call us for a confidential discussion of your situation.  We do provide a discount for situations such as these where you have a prospective buyer in mind.