Something’s changing in the exit strategy world. Business owners are selling to the people who helped them build the company instead of outsiders with cash to burn. While this is not necessarily a surprising trend (it makes sense) it is one that many owners are adopting instead of sticking with traditional sale methods.
Yes, statistics are growing in favor of employee buyouts as the economy remains a lagging contributor to mergers and acquisitions (for example: in 2022 employee ownership transitions experienced a 300% increase in the last decade compared to over 50% growth for other transitions since 2012), but it’s more than numbers; it comes down to what owners desire when selling their company and how they garner value in either approach.
It’s Not Always What It’s Cracked Up To Be To Sell To An Outside Buyer
Selling to a buyer sounds like a straightforward transaction. Someone offers you money, you accept, you negotiate, you close, and you walk away. Easy as pie.
Except it’s not. An outsider buyer doesn’t only want to keep doing what’s already in place, they want to make changes. New management, operations restructures, under-the-table firings, a business that you’ve spent your life creating is decimated in the course of a few months. If you’re an owner who cares what happens after you leave and your employees/supporters are dismissed, this is unfair treatment.
Plus, the notion of finding a buyer never crosses many people’s minds until it’s too late. Unless you’re part of a franchise or expansive industry, there are limited buyers who meet your criteria, a statistic that comes as a surprise to many owners. When buyers do present themselves, it’s often a year-long due diligence process with contingencies, renegotiations and more that either delay the sale or retract it completely, usually after the owner has already checked out.
What’s Different About Selling To Employees?
As long as you sell your business to key employees with a viable succession plan in mind, your key employees aren’t strangers doing what’s best for them from an investment perspective; they’re already apprised of the situation and have assets invested with cares and concerns about keeping things intact.
When an owner sells to its employees, operations remain the same, much to the thankfulness of clients and vendors alike. Management is still in place so stability reigns and from an operational perspective, it’s as natural of an ownership transition as possible.
And here’s something else to consider. Employee buyers are more invested in making the deal work than outsiders for their own means. The dynamic of negotiation is different based on personal incentives, which could potentially benefit a seller.
The Financials Actually Make Sense
One reason why selling to employees seems like less of a better option is that owners think they’ll get less money for it. However, that’s not the case; aside from unconventional payment options, sellers can find better financials through terms of payment than expected.
For example, sellers may not want money immediately; they want dividends over time. For tax purposes, it’s much easier to palter capital gains taxes over multiple years than submit one lump sum that incurs monetary penalties for both seller and buyer.
Financing works, too; banks have a better chance of lending funds to employee groups already at the running business successfully for them as prospective buyers than potential investors without any previous connection. Thus, loans from banks favor employee stock ownership programs more on initial purchase incentives than other buyout situations.
Some sellers keep part ownership for a period of time while receiving dividends as the employee group purchases out rights over time; this keeps sellers connected and receiving monetary payments at the same time.
Preserving Your Life’s Work
Most owners don’t create their companies for monetary purposes (sure, that’s the eventual goal, but there’s always some vision or intent behind the scenes along with relationships built over the years). Selling to a faceless corporation or investment firm dissolves all sentimentality that once accompanied the initial idea.
Selling to employees preserves what so many owners have worked hard for from day one, the mission stays intact, the company name stays intact and those who helped you thrive are also benefitting from employment (not thrown out on the streets due to downsizing).
Of course, not everyone will care about this sensibility component (some business owners are in it purely for money). But for those who have dedicated decades of their lives creating something from nothing, and have been proud of what they’ve created, selling to key employees means it continues without disruption, regardless of price. Unfortunately, you can’t put a price on legacy.
Creating A More Flexible Process
Traditional sales follow a pretty cut-and-dry process. There’s not much creative nature about getting a business sold, fair valuations, brokers, comings/goings/market fees of buyers/sellers, you’d think every step would be easy enough with definitive answers along the way.
Selling to employees opens more flexible options for structuring payments, timelines and future involvement. Do you want to transition over three years? Three months? Do you want a blended option where you buy back in little by little? There becomes possibility because there exists familiarity between buyer and seller that provide trust in what’s best for the integrity of the business.
It’s Not Right For Every Business
Employee ownership works best when certain situations prevail. Your business must be making enough profit where employees can buy-in through other means or financing through assessed viability/potential numbers with them at the reins without your oversight. Also, management needs to be strong enough.
And honesty: employees need to want this option instead of simply coming to work 9-5 like everyone else without any added responsibility.
Thus, if things are going poorly and you’re looking for an exit because your business has suffered too great debts (and you’re looking for forgiveness), employee buyout is probably not your answer unless things are going well and you want continued success under new ownership.
Why This Change Will Keep Changing Going Forward
People say it’s all about things that drive change, and things drive employee ownership forward even when high numbers chip away elsewhere (baby boomers are retiring en masse but can’t find preferred successors; generations strive for profit-sharing; financials have improved; cultural assets matter more than ever).
Much like modern societies champion focus on what happens when businesses change hands, to keep companies local, and give workers stability when they have skins in the game forces owners into what’s best after they’re gone.
If you’re on the fence about how you’d like to exit your company for whatever reason, give selling it to your employees strong consideration as an exit approach. It’s certainly not right for everyone; but it’s more than financially considered, as legacy, culture and employee wellbeing play huge roles in future stability for all involved, and if any benefitted from this newfound social value propelled by owners who’ve made this critical decision lately…it seems they didn’t think it would work out so well for them either.
