Selling a Business to Employees: Part 2
7 July 2023: Selling a Business to Employees: Part 2
Last week’s post – Part 1 of selling a business to its employees – was about using government-sanctioned programs such as ESOPs and EOTs. Though not exclusively for larger business, it’s rare that tiny firms use such programs if for no other reason than the lack of flexibility – to say nothing of the red tape – involved in anything governmental is generally onerous, if not odious, in the extreme.
However, tiny firms often have an employee who is dedicated, integral to the business’ operations and has the mentality of an owner without ever expecting to own any part of it. (My own daughter has displayed these characteristics in every job she’s had from the age of 14. Now, 30, I’m waiting for her to say, “I’m ready, Dad.”)
Such employees may or may not actually have the owner mentality – that is, willing to be “on call”; willing to assume all the responsibility; willing to take on the risks owning a business entails – but such employees are who I would recommend you start with if you’re interested in selling a business.
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If you’d like to learn more, email me at jo*@Wo*******************.com
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We have advised on a number of business transfers in which an employee of a small business bought the owner(s) out. One in particular stands out as a perfect example simply because of its size; it had all of two employees at the time.
The Background
When we got involved, the business was about two years old. There were three owners who knew the business’ service was needed in the market (they had each used competitors for years) but none of them had the knowledge, credentials or time to devote to running this new venture. So they poached an employee from another firm and 60 days later they were up and running.
A year in, the employee needed some help and so an assistant was hired. For the next year, the business continued to grow albeit at a slower pace than the owners had hoped. When we met her, the original employee was obviously unhappy about facing the owners every month to report less-than-stellar news and facing questions such as “why was the phone bill $105 last month when it was only $97 the month before?”. Friction was growing.
This employee had the knowledge, credentials and desire to run the business but she was, as is the case with many people, a little short on confidence in her own ability to own a business, let alone buy one. But after several discussions, during which we showed her how it could be done, she decided to take the leap and offered to buy out one of the partners.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Because she had set the business up and had been running it from its inception, there was little in the amount of due diligence that had to be done. We performed a valuation of the business and then showed her how a deal could be structured so that her share of the business’ profits could pay, over the next couple of years, for the percentage of the business she hoped to buy. All parties agreed to the value we established and 45 days later she bought the equity of a minority owner. She now owned 25% of the business.
Benefits to the Business
Needless to say, when the employee that is running the business becomes an owner, motivation, dedication and innovation all begin to function at a higher level; it’s human nature to tend to what you own. She no longer left the office at 5.00 PM. She started to focus on ways to increase the value of the business, a portion of which was now hers. She was pumped.
In fact, she was so pumped, she came to us about a year later when, having seen a slight increase in business, she began to see some unique opportunities that could pay off over the next few years. She wanted to buy out another partner.
We worked with her again to structure the acquisition and financing of another 24%. She now owned 49% of the business and was down to one partner who, as it happened, was an ally, friend and mentor. And a year later he agreed to sell his 51% to her on favorable terms.
This month, The Brokers Roundtable℠, the online community for business brokers, business owners, Realtors. lenders appraisers and others in the business-for-sale industry, is launching the first in a series of live workshops. This month’s workshop is entitled “Buying PART of a Business”. It discusses the four fundamental elements that must be considered by buyers – and fifth element that business owners looking for partners must consider. This program is for buyers and sellers alike.
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Two years later, all acquisition notes were paid off. She owned 100% of the business and carried no debt from the acquisition. Over the next decade or so she increased sales by 10X, opened a second location and was employing a staff of six. She has, in fact, fielded contacts from two regional competitors about selling.
The Bottom Line
This true story describes the gradual acquisition of 100% of a tiny company by an employee. Some business owners may not want to wait several years to fully divest themselves of their business. But equally important is that many employees, though talented and capable, lack the confidence to commit to a 100% plunge. This was the situation with this young woman.
But a talented and dedicated employee is an ideal candidate to acquire your business. They know its ins and outs; its peculiarities; its customers and systems. As in the case with the young woman in this story, confidence is acquired over time. The owners of the business benefited from her acquisition of that confidence. They were able to safely cash out of a business that was smaller than they should have been in but because the process was gradual, they were able to keep an eye on their investment while the divestment unfolded.
With the right employee(s), even a tiny business can be sold – and the buyer just might be on the payroll!
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com