Selling to the Key Employee

As a business owner, you've done a lot of things right. You worked hard, and you worked smart. You made a solid plan. You capitalized on market opportunities, reinvested in the business and hired and trained good people.

Did you also make a plan for your eventual exit from the business? Even if you have not created a plan, you've mulled over some of your options:

• Gift or sell it to the next generation of family?
• Create a plan for all future employees to have ownership, as in an ESOP?
• Sell it to the open market in a confidential sale through a True North Mergers & Acquisitions advisor?
• Sell it to a key employee?

Let's discuss this last option—selling to an employee—and focus on the pitfalls to avoid and how to best negotiate a deal. We often call this person an "incumbent buyer."

Likely, the employee who wants to buy your business is a key stakeholder, vital to its continuity. As you planned for the day you leave the business, you have transitioned many of the responsibilities on your shoulders while you built the company. Your key person does much of that work and really knows the business.

The first, maybe biggest, question is about the employee's ability to be a company owner, carry the weight of business ownership and risk, be decisive, and be a leader. All the things that your other employees are going to be counting on. Answering this question involves:

• Having frank conversations with that key person.
• Applying your judgment.
• Asking the buyer candidate to self-assess.

You may also want a trusted advisor in on these conversations—a business broker who has seen many deals would be a good choice.

Getting to the right assessment will determine, among other things, whether you are willing to offer to take payments over time, provide a loan, remain a landlord (if you own the building), or stay involved as a consultant or advisor.

Let's say you've done the mutual assessment, and both agree that your key person is a great candidate to own the company. Now, let's look at what lies ahead, starting with the elephant in the room: price.

What's a fair price?

Even in a "friendly" deal, price is the result of negotiation. Your employee probably has an idea of price, which may have more to do with how much they can afford than a fair market price. They're probably looking for a price below what other outsiders might pay.

It actually may be a reasonable ask—they know the business, and they likely know the risks and have the knowledge to succeed better than an outsider. Knowing the risks makes them discount the price, and having the knowledge makes them a more reliable buyer to pay back loans and carry on the business's legacy.

Your position is that you want a fair value for what you've built over the years. And your True North Mergers & Acquisitions advisor has demonstrated that taking the business to market can attract multiple buyers, which can bid the price up and fetch a "market premium". So that's your alternative.

To put some numbers to it: can I get $2.2 million by taking the business to market with True North Mergers & Acquisitions, or will I settle for $2 million from my employee?

Why would you take such a discount? Putting aside your personal feelings for your buyer, possibly a few reasons:

Time is money. Taking the business to market might take more time. It will involve your broker preparing marketing materials, developing a marketing plan, and entertaining inquiries from many potential buyers.

Certainty of money over time. You've already gotten a good assessment of the incumbent buyer and may be more willing to help make the deal happen with seller financing because you're confident they can succeed. It's critical that you get this confidence correct!

Comfort in staying close. In any sale, you'll be asked to help with the transition. That can be uncomfortable with outside buyers. But you know the incumbent buyer, and you know you can work with them. You communicate well, and their knowledge of the business and your customers may make your transition period easier and shorter.

Valuation counsel from your business transaction advisor is invaluable. They will tell you what price you could fetch in the market, as well as your likely net after-tax proceeds. And they can help you "sell" your buyer on the final price, helping make a good deal and comfortable transition for everyone.

Coming back to the options we listed up front—generational transfer, ESOP, market offering, or incumbent buyer—do this:

Get the opinion of an expert on the likely price for your business. Know the best price you can get and understand the trade-offs between these choices.

About the Author

Len Washko is the Business Price Opinion Advisor here at True North Mergers & Acquisitions. Connect with Len to get his expert opinion about the potential price of your business.