When you decide to sell a business, the main obstacle that stalls that process is usually finding the right buyer. For lots of business owners, the answer to this problem is often sitting in morning meetings already – an employee that is interested in the business. Is selling to an employee a good idea? There are several things to consider before deciding yes or no.
First of all, would they want the business? They already know that the copy machine doesn’t work quite right all the time. They also know that one of your biggest customers hasn’t been very happy lately and might move on to a different supplier. Maybe they’re a key player in your organisation and responsible for some fairly major operational aspects.
For that matter, just because they know the business doesn’t necessarily mean they have the skills or entrepreneurial spirit that you have to continue the business as it is now or take it to greater heights. If you’re at all concerned about the business continuing to be what you’ve made of it or what your legacy will become once you’re out of the picture, they may or may not be a smart choice.
Secondly, there’s the matter of funding. It should go without saying that if they are your employee you know at least what their income is, even if their entire financial situation isn’t as obvious. If they had the money to buy a business, would they be working for someone else to start with? Entertaining the idea of selling to someone you aren’t sure can afford the purchase can be a tedious exercise in futility, not to mention that it could end up costing you the relationship with them.
Funding options can be dodgy sometimes in this kind of situation, and it’s not uncommon for the employee to be unable to get bank or investor funding. That leaves either a rich family member to lend them the funds (which isn’t going to happen 99% of the time) or what is known as vendor financing – that is, you financing them. If they can’t get any other kind of funding to start with, this can be extremely risky and end with you moving back in to take control again while possibly losing the employee in the process. Again, a much less than ideal way to go.
If you do go this route, you also put yourself in the situation of disclosing your own financials to an employee – with no guarantee that they will become the new owner. From my experience, 9 times out of 10 this type of situation falls apart. That leaves you still owning and running the business, now with an employee that has full knowledge of all your financial dealings. Less than ideal is a mild description of that situation.
With all of that said, selling your business to an employee isn’t impossible and it does happen successfully sometimes. The key to making this happen, based on many such deals that we’ve made happen over the years, is to have an expert business broker involved with the deal. The business broker is a third party buffer between you and any of the potential problems we’ve mentioned, giving you a large measure of protection against things going badly.
90 percent of the work to sell a business is finding the right buyer. Having the right broker to structure the deal, whether that potential buyer is an employee or not, makes that 90% much simpler and is more likely to lead to a smooth and successful sale.