The topic that generates the most discussion among the hundreds of shop owners with whom I interact each year regards the business succession option of selling to an employee.
All of you, from time to time, have likely had an employee who you thought might be a good candidate for taking over your business. As time goes by, it’s probable that some of those employees have quit and moved on, quit and bought someone else’s business or demonstrated at some point that they weren’t capable or responsible enough for handling all the aspects of owning a business as you had originally thought.
Selling to an employee isn’t an option for every shop owner. Sometimes, healthy businesses simply don’t have any employees who are willing or capable of taking over. In other cases, financial considerations and/or the seller’s exit plans make an employee-based sale a no-go.
Many sellers simply don’t know enough about an employee’s financial situation to determine if they have the capability or the courage to purchase the business and worry about the ramifications if they broach the subject with the employee, thereby disclosing their motivation to retire. They fear that the key employee might worry about their future job security if the business is sold to an outside party and start looking for a job elsewhere.
But, there are also many happy endings in which a qualified employee takes over the business in a smooth transition and everything works out well for all involved. In fact, under the right conditions, selling to an employee can provide several important benefits, especially when buyers have a lot of options in the marketplace like they have now.
Good Reasons for Selling to an Employee
There are many psychological and emotional factors at play when you consider selling to an employee, so it is important to think them through and make sure you are making your decision for the right reasons. After all, your financial security for your retirement may be at stake. Most sellers contemplating the sale of their business to an employee consider at least one, if not all, of the following factors:
> When considering all of the complications and potential twists and turns involved in a business sale, especially when the buyer is a stranger, selling to an employee sounds like a much quicker and easier process than going through a more entangled process with an outside buyer. After all, it’s human nature to take the path of least resistance.
In a typical sale scenario, owners spend a lot of time selling prospective buyers on the virtues of their companies. Since employees are already familiar with your business, you won’t have the hassle of investing time and energy in the marketing aspects of a successful business sale. Although you’ll still need to adhere to sales fundamentals, an employee-based sale can mean a much easier process than selling to an outsider.
- You may be a friend of the employee, as well as the employer, and feel a sense of loyalty towards them. In fact, this relationship can be at the heart of the urge to sell to a specific employee.
- You may feel an obligation to sell to an employee and the employee wants or expects it.
- A sale to an employee often results in a smoother and faster transition for everyone involved because the shop’s staff, customers and vendors would already know the new owner.
- Selling to an employee or multiple employees also allows you to make a clean break with the business rather than staying onboard for a period of time after the sale to provide extensive training, support and guidance, especially if you have taken the time before closing to train the employee on the financial, marketing and operational aspects of the business.
- You have a concern for business continuity and your legacy in the community and feel it will be best cared for into the future by your employee. As a responsible business owner, you care about what happens to your company after you’re out of the picture. Next to a family member, a trusted employee is the person who is most likely to maintain the existing company culture and operate the company in a manner that is consistent with your values, while continuing to employ team members who, in many cases, have come to feel like an extended family.
It can be painful to think about selling your business to a stranger who may or may not carry on the positive reputation you have nourished over the years. For example, you may think that an employee will carry on the business in the way that you have groomed him/her to do, as you have overseen his or her activities over the years. For you, that might create a sense of control over the future of the business after the sale. This may or may not be a healthy reason, and could lead to disappointment if the future doesn’t play out as you might hope.
Perhaps the best example of a sale to an employee that I have encountered was the purchase of Wright’s Automotive by John Bridgwater, featured in the January/February 2015 issue of Shop Owner. John had expressed his interest in buying the business in an initial hiring interview for a technician position. He gradually learned the full-circle skills to successfully operate a business by accepting additional responsibilities and being coached in all aspects of the business by owners Ken and Winnie Wright. I was able to help with securing financing for John and navigating the various steps of the transition process.
Reasons Why Selling to an Employee Might Not Be The Best Option for You
- The employee is thinking that he/she should pay less than fair market value.
- The employee may think that he/she is owed something for having worked at the company (over and above the salary he/she was paid), or that the success and value of the business is most attributable to their efforts. Some employees may even think that the business would not have survived without them.
- If the employee makes an unacceptable purchase offer to you, tries to get financing and is unsuccessful or the deal falls through for some other reason, then you are left in an awkward situation. In this case, you are at risk of the key employee losing motivation and not perform as well. This person may also leave altogether, or if disgruntled, break the confidentiality commitment and let other employees know of your intentions.
- While the employee may have excellent skills as a technician, service advisor or manager of your business, there is always the question of having the “full-circle skills” (i.e., the ability to do everything that is involved in buying the business and successfully operating it going forward).
- If you have doubts about the business surviving if purchased by one of your employees, then you may be doing a disservice to the rest of the loyal employees who rely on their steady paycheck. After all, if the business fails under new ownership, they lose their source of income.
- If you are providing seller financing or if you own the building and will be renting it to the employee/buyer, then your retirement income is dependent upon the future success under the new ownership. Of course, the last thing you want is to have to take the business back if the employee/buyer fails as an owner/operator and the business is now losing money and in debt.
Back in the day when I owned four automotive repair centers, I sold one of them to my general manager and financed 100% of the sale price. Unfortunately, within two years, he gave me back the keys and I had to find another buyer. While he was a good salesman and operations manager, he didn’t have a practical sense of financial priorities and supporting his race car hobby was more important to him than making rent and note payments.
DIY or Hire a Broker?
Once the decision has been made to sell to an employee, should you do it yourself or hire a business broker to oversee the process? Here are some considerations to think about:
- Have you already worked out a selling price and real estate/lease terms satisfactory to both parties?
- Does the employee have a sufficient down payment, otherwise qualify for bank financing and have the skills and contacts to secure the necessary financing?
- Do you have the luxury of time in your business succession plan to spend several months trying to work a deal with the employee before opening up the opportunity to outside buyers?
- Are you prepared to deal with potential hitches in the deal directly with the employee, or is there a benefit to having an outside party mediate any potential issues that might arise during the process? This is more likely the case if the employee is going to be hiring an accountant or attorney to look after his/her interests.
- Will a broker offer a reduced success fee if the employee purchases the business?
In a case where there is a sense of urgency to sell the business either due to health or personal reasons, and there is an employee as a possible buyer, a strategy with a broker can be developed to pursue parallel initiatives to support both the efforts of the employee to purchase the business, while at the same time engaging a broker to fully advertise and market the business to outside parties.