The sale of a business to its employees can be both rewarding and challenging for a business owner. On one hand, this type of sale is an opportunity to transition the company to people who are an integral part of the operation, which can help ensure a smooth transition. On the other hand, the employees purchasing the business may not have access to the funds required to pay for the business, which can result in significant seller financing. A business owner must weigh a number of factors when determining whether or not to sell the business to their employees.

The sale of a business to employees is usually structured in one of two ways: (1) a sale to one or more key employees; or (2) a sale to an Employee Stock Ownership Plan (ESOP).

In a sale to key employees, the business owner transitions his or her business to certain key members of management that have been employed by the company for a number of years. These key employees know the business, including its important customers and vendors, and they are likely already familiar with the company’s financial position.

In a sale to an ESOP, the owner transfers his or her ownership interest to all qualified employees of the company through the use of an ESOP trust. The qualified employees invest in the ESOP trust in order to fund the purchase. This option allows all of the employees of the business to own the company, subject to the ESOP’s vesting requirements. An ESOP can be an attractive option, but also requires a number of additional costs necessary to create and maintain the ESOP trust, including valuation, trustee and legal costs.

Regardless of whether the business is sold to key employees or an ESOP, the business owner usually provides seller financing for a significant portion of the purchase price. Employees must use after-tax funds in order to fund a purchase, so it is rare for a business owner to receive the full purchase price at the time of closing. Although it is necessary to weigh all risks involved, many business owners find the risk associated with seller financing acceptable because they feel that a transition to their employees is the best fit for them and their business.

If you have questions about selling your business to employees, or any other questions regarding buying or selling a business, please contact Jake Dunlop or any member of the Rhoades McKee M&A Team.

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