Council Post: Exit Planning For A Sale To A Key Employee
A major, yet often overlooked, aspect of exit planning is determining who you're going to sell your business to, and how it will transfer once the sale is lined up.
Getty One of the most important aspects of exit planning, but often overlooked, is deciding who your business will be sold to and how it will transfer after the sale. Many family business owners have a preferred buyer, but those selling on the open marketplace are open to all possibilities. What if you are looking to sell your company? There are many pros and cons to selling the business to employees or a group of them. To ensure a smooth exit and a successful sale, it is important to understand the potential challenges presented by employees. You can then create a plan for addressing the issues once you are aware of all the ups and downs. Familiarity is one of the best benefits of selling your company. Your team member will likely have a good understanding of your company's vision, mission, and values. This makes them more likely to continue your business legacy, which can help to make the transition easier.
Your team members are familiar with the way you run the business. They are familiar with the challenges you have faced. It is likely that this familiarity and understanding has helped businesses who have moved from the owner to their employees have a higher survival rate that their third-party counterparts. A study by the University of Caen Normandy, France found that businesses who transfer employees to their business have a 97.3% survival ratio through year 1. This is only slightly more than companies that transfer to buyers outside of the company. This advantage in survivability grows year after year. Businesses that were sold directly to employees had a 13.7% advantage in survival over businesses sold to outside buyers at year five. If you want to ensure your legacy is preserved after your exit, it's important to consider the transfer method. What are the potential consequences of selling to a key employee? Business owners face greater risks than employees. Selling to employees reduces the number of buyers. This could have a negative impact on your business's purchase price. You won't get a lump-sum payment either. Your employee might not be able to pay cash so you may need to be flexible about how you structure the purchase. You could sell the company via a seller carry or installment sale. In each case, you are the bank. Your employee could be too comfortable with you and not make timely payments. Although they might not be deliberately taking advantage of your company, this is something that should be discussed in the purchase agreement. You should consult your lawyers and advisors when you use an installment sale to make sure you are not subject to higher taxation. Even if an employee makes all their payments on time, it is important to protect the equity that you have built in your business. You must be able and willing to regularly review key performance indicators as well as critical success factors throughout the installment sale. It's a great way for customers to be cared for the same way that you have cared for them. This type of familiarity has many benefits. Knowing the risks will help you plan for them, and in some cases even eliminate them. Talk to your advisors if you are looking to sell your company. Reexamine your plans and make changes to suit your needs and the business. This information is not intended to be used as investment, tax, or financial advice. Forbes Finance Council is an invitation only organization for successful accountants, wealth managers and financial planners. Do I qualify?