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Why Owners Sell Their Companies to Key Employees
 The first in a series.
As a business owner familiar with exit planning, you know that you can leave your business in one of eight ways. You can:
1. Transfer your company to a family member.
2. Sell the business to one or more key employees.
3. Sell to key employees using an ESOP (Employee Stock Option Plan).
4. Sell the business to one or more co-owners.
5. Sell to an outside third party.
6. Engage in an IPO (initial public offering).
7. Retain ownership and become a passive owner.
8. Liquidate.
If you don’t have a co-owner or family member willing or able to succeed you, or your company is worth less than $2 million, your best option may be to sell your company to key employees.
This article is the first of a three-part series that explains why owners may want to sell to their employees; what conditions often prompt an owner to sell to key employees; and finally, what obstacles can prevent this type of transfer.
Many advisors to business owners think a sale to key employees is a great option for companies that don’t reach the “sale to third party” threshold. Typically, they define this threshold as the point at which a business can be sold for (largely) cash.
Depending on a variety of factors, this threshold is usually around $10 million. While this may cause some owners to consider a sale to key employees, it is not the reason that most of them want to sell to key employees. Over the years, we have found that owners choose to transfer their companies to key employees for seven different reasons.
- Deserving Employees. Some owners feel that they owe their employees something. They feel that their key employees have helped create the company and certainly have contributed to its success. These employees “deserve” the opportunity to purchase the business.
- Financial Opportunities. Some owners want to provide their key employees the same opportunity they had to become financially successful.
- Committed to a Promise. Other owners choose this transfer because they have already promised their employees that they would sell to them. They feel committed to following through on this oft-times vague promise.
- Continue the Legacy. Some owners feel that the only way to continue their legacies, “do right” by their customers or carry on the culture that they have worked so hard to create is to transfer to their key employees.
- Only of Value to Key Employees. Other owners are convinced — some correctly so — that their companies are only valuable to the key employees who work there. With few exceptions, there is a market for companies worth more than $2 million. Historically, businesses worth less than $2 million (businesses with free cash flow of less than between $300,000 to $500,000) hold little attraction to outside third parties.
- Maximizing Income. Maximizing their own income motivates some owners. They believe that key employees will pay more for their companies than any other type of buyer. This assumption, in turn, is based on another assumption that the business is not attractive to, or would be misunderstood by, outside buyers.
- Motivating Employees. Lastly, some owners use the gradual sale of ownership interest to key employees as a way to motivate those employees to stay with the company.
No matter which of these is your reason to want to sell your business to key employees, it is prudent to investigate your motives thoroughly. For example, if you believe that your business (at a favorable valuation) is simply not attractive to outside buyers, talk to others to test your hypothesis.
When owners want to transfer their businesses to key employees, do they actually do so? In the next article, you will learn five reasons owners actually do transfer their companies to key employees.
Ken Stiefler is president of eXITS, LLC and Stiefler Financial Solutions in Denver and has worked with business owners for more than 21 years to help them achieve their financial and succession objectives. Stiefler is an affiliate member of the Business Enterprise Institute Network of Exit Planning Advisors and the Home Builders Association of Metro Denver. For more information, call Stiefler at 303-695-6994, or visit his web site at www.kasfinancialsolutions.com.
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