Every smart business owner must have a carefully planned out exit strategy. The reason is because no matter how much you desire it, you cannot continue to run your business forever. There will come a time when you are either too old or too weak to run the business and you would have to hand over the management of the business to someone who can handle it better.
Apart from old age, there are other things that could hinder you from continuing to manage your business like sickness, death, retirement and debt amongst others. Therefore, you must begin your business succession planning from the first day you commence operations.
There are so many exit strategies which business owners can adopt but we are only going to focus on selling your business to a key employee today.
After several years of hard work and struggling to build a business empire, it is understandable that you would have a strong emotional attachment for your business and would like to find a way to keep your business close to your heart even after sales. One of the ways through which you can achieve this is by selling your business to someone you already know and trust; someone you are sure would be able to successfully manage the business and not run it into the round and most importantly, someone who would still allow you to be a part of the business maybe as a consultant or an advisor.
Selling your business to a key employee is a good idea but it comes with some challenge. One of such challenges is that of finance. It is unlikely that your employee would have hundreds or thousands of dollars stashed somewhere which could be used to finance a purchase. Most times, your employees would not be able to afford it but there are steps that you could take if you really desire to sell your business to your employee. Some of the steps are outlined below-:
How to Sell Your Business to a Key Employee
1. Long Term Installment Sale-: This method makes it easy for you to sell your business to your employee even if they do not have cash available. The first step to take when following this course of action is to carry out a business valuation to determine how much the company is worth. After that, you would either select your preferred employee or throw it open to interested employees for bidding. Upon winning the bid, you would decide on the length of period you would like to allow for payment and then an interest rate as well. A promissory note signed by both parties and backed by the company’s assets and stocks would then be held by you (the seller). You could also request for additional security like personal property or guarantees as you deem fit. With this method, no cash exchange is involved and all payments are deferred to a later date.
2. Leveraged Management Buyout-: Another strategy that you could adopt is the leveraged management buyout. This method helps you to minimize your risk and at the same time, reward your key employees by selling your business to them. However, certain conditions need to be met before you could be eligible to adopt this business sales strategy.
First, You must have a capable management team that could take over the running of the business in your absence, your business must have a stable cash flow, it must be a business with a lot of future prospects for growth, the business must have a tangible assets base to facilitate debt financing and lastly, the business must have a fair market value of not less than $5,000,000. If your business meets all of the stated criteria, then you and your management team has to come together to agree on a fair value for the company after which a letter of intent would be executed giving a grace period of between 90-120 days for the management team to purchase the business. At this point, the management team would now have to look for an equity investor who has the funds to finance the purchase.
3. Employee Stock Ownership Plans-: A lot of companies actually adopt this strategy which is popularly known as ESOP. It is a kind of profit sharing plan that makes the employees of your business part-owners of the business. The employer would make tax-deferred contributions that can only be invested in the company’s stocks. It is usually adopted as a means of motivating employees and allowing them to partake in the success of the business. An employee that wishes to buy your business could do so by borrowing money from the bank against the ESOP. This money is then used to purchase your own (business owner’s) stocks in the business. Where a key employee cannot single-handedly finance the purchase, a group of employees can come together to do so jointly.
4. Modified Buyout-: This method involves offering about 40% of the ownership stocks (non-voting) of the business for immediate and future purchase by the company employees. The stock is valued and then adjusted downwards in order to make it affordable for employees. This would encourage employees to remain with the company. The employees are also given an extended period to pay for the stocks; say four or five years and then when the payments have been made, the business owner can now decide to sell the remaining stocks (60%) to key employees for cash, sell to a third party or continue to own the company. This method is usually preferred by business owners because it helps them achieve most of their goals when selling the business;
- They receive a fair market value for their business.
- Trusted key employees receive the majority share in the business.
- Other employees get to participate in the shares and are motivated to work harder and contribute to the growth of the business.
However, this method takes time and if you must adopt this strategy, you must start planning well ahead as it would take at least five years to complete the sale.