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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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We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
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Larry Moore, Owner, A Company Portable Restrooms
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Terry D. Wickman, President, Keytroller
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Tom Currier, Former President & CEO, Rackmount Solutions
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
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Robert Evans, President and CEO of Mealtracker Dietary Software
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
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.
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
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.
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
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Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
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Pete L.
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Ralph Noblin, President of Noblin & Associates
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
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Jay Dinnison, Owner of Sharpe Mixers
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Jay Dinnison, Owner of Sharpe Mixers
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
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Bryan D. Horn, Owner, Over Under Clothing
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters