Selling your business to your key employees gives you an alternative plan for exit. There are a variety of deals that both buyers and seller could rely on to make the process easier:
- Long-term installment sale
- Management buyouts that leveraged the use of leverage
- Employee Stock Ownership Plan (ESOP)
In this article we’ll explore the advantages and disadvantages of lean management each strategy we’ve discussed above.
Long-term Installment Sale
This is the standard method of transferring ownership from employees. The process starts with an company valuation to determine the value the company’s worth. This is followed by identifying the potential buyers or employees. Discussions regarding the repayment time frame and how this deal is funded will then be arranged.
- This installment sale will be secured with the company’s assets
- The continuity of business is assured since new management is made up of employees who are currently employed by the company.
- A guarantee of a regular payment to the seller over the course of time
- You may negotiate to keep your benefits and salary throughout the transition
- Your compensation as a seller will depend on the future performance of your company.
- There aren’t any major settlements at the close.
- The way of managing the employee/buyer may run the business into the ground
- Failure to reach a settlement with the employee may cause a conflict in the workplace
- Transfer of ownership can take a long time
One of the biggest hurdles for employees looking to buy a business is the absence of financing. Through leveraged management buyouts the seller or buyer may choose to incorporate an outside entity in the form of an equity company, a private equity company (PE) or the venture capitalist (VC) or a traditional lender.
Important to Remember
It’s important to remember that this kind of is most effective lean portfolio management when the value of the business is at or above $5 million. The VC/PE will also need to be able to identify a competent management team, and ask that the business has an adequate asset base to speed up the process of financing debt prior to beginning.
- Offers a faster exit option that the vendor can take (than the long-term installment sales)
- A seller is paid a total and immediate cash payment
- VC/PE can be used to provide future cash to boost the growth of a business
- Employees have the opportunity to increase their equity stake within the company with time.