You can sell your business to your employees with an ESOP!

The number of small business for sale in the US is growing. Business selling websites like Bizbuyandsell.com and Businessesforsale.com are reporting record high numbers. AARP states that as the Baby Boomer generation ages they are looking to sell to businesses and retire in record numbers as well.  Often there is no family member willing or able to take over a business and the business goes out to the general market.  There is another option.

Selling to a trusted employee or a group of employees is becoming an attractive option for baby boomers and other sellers eager to achieve a smooth exit. Selling to an employee isn't an option for every business owner.  But if there is a competent employee with the ability to take over this can be a good option.  Here are some reasons why:

  • Continuity--As a responsible business owner, you care about what happens to your company and want to keep the same experience for your customer even after you leave.

  • Understanding. Your employees are already familiar with your business, you won't have to invest time and energy in convincing them of the value of the business they know the business through and through.

  • Transition--A sale to an employee often results in a smoother and faster transition for everyone involved because the company's staff, customers and vendors already know the new owner.

Selling to an employee can have  some potential drawbacks. For example, it's not uncommon for employee-based deals to result in a lower sale price than the price that could be achieved if advertised in the open market.

Employees often lack the assets and capital to purchase companies outright. And that means sellers have to play an active role in helping their employee(s) fund or finance the transfer of ownership. Another option is an ESOP to fund the sale:

An Employee Stock Ownership Plan (ESOP) differs from selling the business to a single employee, in that  an ESOP enables you to transfer ownership of the business to all qualified employees.

ESOPs are usually treated as a workforce benefit. Employees receive an ownership stake in the business as part of their compensation, with shares that are held in trust until each employee leaves the company.

When an ESOP is used to fund a sale, the employees invests cash in the ESOP trust, which is then used to acquire the owner's shares in the business over time. In some cases, the ESOP can be funded through commercial financing, reducing the amount of time it takes for the seller to receive proceeds from the sale.

More commonly, ESOPs are funded through seller financing. Essentially, the ESOP acquires all of the owner's shares at once and pays the seller for the shares with a note that yields a healthy interest rate. Ownership of the company transfers to the employees and the seller receives the sale price plus interest.

As a seller, an ESOP can be a convenient way to achieve multiple sale goals, provided you can afford to finance a significant portion of the sale price. Also, an ESOP may provide important tax advantages (e.g., deferral of capital gains tax), depending on how the transaction is structured.

Is Selling to an Employee the Right Move for You?

Selling to an employee or a group of employees provides another option for selling your business in today's crowded marketplace. At GMG CPA we can help you sort through the benefits of selling your business to your employees, we can use accounting practices to help establish the value of your business and advise you in next steps.