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Is it a Risk to Sell Your Business to Your Employees?

By Generational Equity

Sell Your Business to Employees

A few weeks ago at one of our exit planning conferences, an attendee approached our managing director during a break and thanked us for holding the meeting, but said he wasn’t sure the conference was right for him because he was committed to selling the business to one of his key employees.

Our managing director convinced the business owner to stay for the entire meeting because one of the topics we cover is the downsides of selling a business to your employees.

And he was very glad he stayed because he was not familiar with some of the risks in pursuing this approach when exiting a company.

What are the Dangers of Selling a Business to Employees?

We encounter this line of thinking quite a bit in our business and on the one hand, it is natural to want to thank your key players by offering them the opportunity to acquire your business.

It can be demonstrated as a reward for their efforts in growing the business, and many believe their knowledge of the company’s inner-workings would make them ideal owners.

However, too often the choice to sell a business to employees is an emotional decision made without considering some possible outcomes that frequently crop up later. Here are just a few of the most common issues:

  • Often it turns out that the key employee, although great at the role he/she is currently in, does not have the skillset to thrive as CEO.
  • Sometimes selling to a key employee causes jealous rifts among the entire workforce that impact the company, potentially causing other key people to leave, and significantly affecting the performance of the company.
  • Since most key employees do not have the capital to fund an acquisition, usually the seller agrees to take a long-term note, which is paid off often over as long as 10 years.

Far too often we encounter business owners who have been impacted by all three of these risk factors. The first two risks you are facing directly impact the performance of the company in the long run, usually creating the true impact of the third risk listed: The key employee (now CEO) stops making payments as agreed because the once great company is now underperforming.

Don’t Make the Mistake of Selling Your Company to the Wrong Buyer

History is littered with business owners who, after selling their business to a key employee, are forced to come out of retirement 4-5 years down the road and try to save the entire enterprise.

This can have a devastating impact on the ex-owner, his/her health, and their family, as well as the financial ramifications, which can be enormous.

We believe that the significant risks associated with this strategy far outweigh any benefit to the current owner (and also the key employee).

In most cases, it is far better to find a third party with deep pockets and experience running a business to sell the company to rather than hope that Larry, who is a great shop foreman, has the aptitude and attitude to be a successful CEO (and really wants to be one).

Especially right now, when we are experiencing one of the strongest seller’s markets in decades, experienced, professional buyers are increasingly active.

This not only helps those interested in exiting their company achieve the maximum value in this competitive market, but find the buyer that will continue and build on the legacy you have created in your business.  Let's face it, for most business owners the emotional goal is to ensure that the company name and its role in the community is preserved post sale.   Selling to a key employee often endangers that.

If you would like to learn more about optimal buyers, including how to find them, negotiate with them and close a deal, then you should attend a Generational Equity exit planning conference.

If you have considered selling the business to a key employee, we strongly encourage you to attend and discover the options available to you.

To learn more about our insightful conference, call us at 972-232-1121, or visit our website and provide us with your contact information and we will be in touch.

And please, before you sell to an employee, carefully research some of the potential negative consequences. It could save you millions when you exit.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”
Karen S. Williams, CFO, BW Manufacturing
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.
Shenille Engelhart, Owner – CLS Technology
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!
Andy Graham, Vice President, Modern Heating & Plumbing
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.
Karen S. Williams, CFO, BW Manufacturing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.
Michael J Polarek, President, Paragon Packaging
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.
Michael J Polarek, President, Paragon Packaging
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.