There are a number of benefits to selling your small business to an employee. In fact, it is one of the most common ways owners exit their business. If your goal is to get the highest price for the business, you may want to market your business to prospective buyers in your local community. If you want a fair price and the legacy of your business is important, having an employee buy the business may be right for you. Here are three reasons why selling your business to an employee is a great outcome.
A Fair Price For Your Business
You can obtain a business valuation from a financial analyst or CPA or through online services like ExitGuide. A valuation provides a starting point in negotiations. Negotiating with a third party buyer you do not know is different from negotiating with an employee. While price is important, typically the parties have a desire to do what they believe to be fair for both sides and a strong desire to complete the transaction. Agreeing to a price is the first step, how the employee will pay the sale price is just as important. In most cases, the employee will not have the funds to pay the full amount at the time of closing.
A few options are available, one is for the employee to use an SBA loan which means they must meet the qualifications for what is known as an SBA 7a loan. This may require you (the seller) to guarantee the loan or another party that will guarantee the loan on behalf of the employee. Talking to your local bank early in the process will give you a sense of this option. Another alternative is seller financing, this is the most common approach for businesses worth less than $3M. Seller financing is an agreement between seller and buyer that allows the buyer to pay the price plus interest over a defined period of time using proceeds from the business. You can learn more about seller financing by reading What Is Seller Financing and Why Is It So Common When Selling A Small Business?
A Smooth Transition Of The Business
It may be hard to imagine but the day will come when your business will operate without you. Knowing your business is in good hands provides peace of mind. Additionally, if you choose seller financing, transitioning to an owner that knows and cares about your business may help ensure that the business continues to grow. An employee brings institutional knowledge of how things work, customer relationships and is someone other employees will trust to continue operating the business.
Selling your small business to an employee may also reduce the due diligence period. If someone is not familiar with the business, they will need time to dig into the details, understand the opportunities ahead whereas an employee already has a deep understanding of the business and may be excited to bring new ideas to the table. Most buyers will want a commitment from the previous owner to assist with a transition. An employee may want a commitment as well but the learning curve is not as steep which will require less time from you.
Over 50% of ExitGudie customers plan to transition their business to family, a business partner or an employee
Ensuring A Positive Legacy For The Business
You probably have an emotional attachment to your business and the thought of having someone else take over can be difficult. It is critical that you take into account the emotional aspect and may benefit from reading 4 Tips to Handle The Emotions Of Letting Go Of Your Small Business. You have worked hard to build the business and it is understandable you want a new owner to have the same level of commitment to your business. Whether your name is on the door or not, the business is part of your identity and having an employee that has worked in the business for years is the best way to ensure the same level of attention carries on after you exit.
One thing is certain, every owner eventually exits their business. The reasons for exiting vary and it is important to understand what is most important to you as you make a plan. Is it maximizing price? Carrying on a tradition? Knowing the customers and employees will continue to operate and thrive after you depart? Selling your small business to an employee can be a positive outcome financially and address other goals for you and your business.