How To Sell A Business To Your Employees (Step-By-Step Guide)

How To Sell A Business To Your Employees (Step-By-Step Guide)
RMEOC
September 9, 2021

If you’re looking for an exit strategy, selling your business to your employees is one of the best options to consider.

But if you’re a little confused or unsure about what that might entail, you’re in the right place to learn more.

Selling your business to your employees isn’t as complicated as it seems, and sometimes it’s even less complex than other potential strategies like selling to an external buyer.

In this article we’ll break down the four steps you should take to sell your business to your employees, plus how to determine whether employee ownership is the right exit strategy for you.

Note: Interested in selling your business to your employees? Schedule a free consultation to talk to one of our specialists today and see if it’s a good fit for you.

Is A Sale To Your Employees Right For You?

Generally speaking, business owners look to employee ownership for two main reasons:

They’re retiring or otherwise considering a different life for themselves, so they need an exit strategy.

They have an intrinsic desire to give workers equity by converting to employee ownership.

Employee ownership brings a myriad of benefits to any business, but some structures work better for some than others.

Employee stock ownership plans (ESOPs) in particular tend to require a minimum threshold in terms of size and revenue in order to keep up with the transaction and maintenance costs.

Other forms of employee ownership like worker cooperatives are less costly, but they come with a different set of advantages and don’t have all the benefits ESOPs do.

Regardless, if you do think you’re a good fit for selling a business to your employees, it’s important to have guidance along the way. Don’t try to go it alone, and make sure you seek out expertise in all areas of the transaction.

Since an ESOP is a retirement plan structure governed by the Department of Labor and the IRS, it’s important to have qualified legal advice in addition to financial expertise.

Some firms provide both services in one. Not all do, however, so it’s important to do your homework and make sure you have all the information you need to make the right decisions.

Step 1: Conduct A Transaction Analysis

Sometimes referred to as a feasibility study, the purpose of a transaction analysis is to gather information about your business and begin to construct a valuation and a transition structure.

An advisory firm may structure several different transition options for you to suit your individual needs. Then they’ll review their results with you, revise and adjust based on new information, and come to an agreement with you regarding the valuation of your business.

Step 2: Develop A Roadmap

Once a value and a transition structure for your business has been determined, you should come up with a roadmap with your advisors to give clarity and direction to the transaction process.

Success really does come down to effective planning, and being well-organized means that there will be fewer hiccups along the way. It’s also a good way to manage expectations, timeline, and what will be required from everyone involved.

Selling your business to anyone takes work. Most of that effort involves gathering and sharing information. You’ll likely need to have several meetings or phone calls in order for each party to have a true understanding of the valuation and clarity around the sale process.

Step 3: Execute

With a solid roadmap in place clearly delineating the process of selling your business to your employees, moving forward becomes a matter of execution.

For an ESOP, you’ll need to hire a trustee who will then hire their own legal and financial advisors and represent the buyer side of the transaction.

You and your advisors will present a term sheet to your buyer (the trustee, in this case) that covers all the details: the structure of the sale, what percentage of the business is being sold, how it will be financed, and more.

The buyer will then do due diligence on their side and come to an agreement regarding the business valuation and terms of the sale. Any final negotiations happen at this stage before the final closing.

Step 4: Close The Sale

From there, all that’s left to do is close the sale!

A sale is considered closed once negotiations are finalized and everything is 100% completed — there’s no more work to be done.

That means everyone has agreed on each aspect of the transaction, the funds have been purchased by the ESOP trust and transferred to the appropriate places, and all documents have been swapped and signed.

Need To Keep Your Options Open?

What if you’re still unsure whether selling your business to your employees is right for you?

A solid advisory firm will be able to do a strategic alternatives analysis weighing the options of transitioning to an ESOP or selling to an external third-party buyer, among other options.

Some business owners choose to run a dual-track process, where they work with their advisors to simultaneously go down the ESOP and third-party sale routes.

It’s more expensive, but the advantage is price discovery — you really know what the business is worth — and deferring a decision until the end.

Conclusion

Selling your business to your employees does take work, but that doesn’t have to mean that it’s complicated. It can be as simple as conducting a feasibility study, developing a roadmap, executing on the plan, and closing the sale.

The process from an initial consultation to the final transaction typically takes between six and nine months. That’s about 60 days for the feasibility study and four to six months for the execution.

Of course, some business owners get moving quickly while others take longer to ponder and come back to it.

No matter your timing, one of the biggest advantages of selling your business to your employees is that the option is almost always there for you.

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Special thanks to Ken Wanko of SES ESOP Strategies, who lent his subject matter expertise to this topic in an interview.

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Interested in selling your business to your employees? Schedule a free consultation to talk to one of our specialists today and see if it’s a good fit for you.