IBA Blog

  • Categories
  • Authors
  • Archives
  • Selling a Privately Held Company to Employees

    Aug 26, 2015

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Allan VanderHamm of Berntson Porter & Company, PLLC.

    Can You Afford To Sell To Your Employees?

    Business owners often tell us that, in an ideal world, they would sell their businesses to their best, most loyal and/or most ambitious employees. Business owners frequently dismiss this option because their employees don’t have enough money to buy the business. Is this the right decision? Is there a secret ingredient that might allow you to sell your business to one or more employees and still get the value you want and deserve?

    Take Steve Sampson, the fictional owner of fictional company Sampson Scientific, Inc., a 30-year old scientific equipment distributor. Steve’s management team was capable and interested in buying the company. The business had little debt and good cash flow.

    When Steve confided in his advisors at an annual planning meeting that he had always hoped to sell his business to his employees but he just did not see any way to make that happen, one of their first questions was, “When do you want to leave the business?”

    If Steve had answered, “Now!” a sale to employees who lack cash would have been fraught with risk. If Steve’s answer was, “I’d like to be out — both financially and as a participant in management — in five to eight years,” a well-designed Exit Plan would have made that happen—if Steve had started today.

    Plan Goals

    Any buy-out plan, regardless of the buyer, must accomplish three goals:

    1.Minimize the owner’s, the company’s and the employees’ risk, by keeping the owner in control of the business and the sale process until the owner receives the entire purchase price.

    2.Ensure that the owner receives full value for his or her ownership interest.

    3.Allows the owner to stay in control until full value is received.

    Unless a buy-out plan meets these goals, owners would be wise to reconsider selling their companies to their employees. If, on the other hand, owners plan and begin to execute a transfer plan well in advance of their departures, they can achieve these three goals. Of course, special planning is required to meet the income tax minimization goal.

    The Secret? …Time

    A plan to execute an employee buy-out has two stages.

    Stage 1: Sell incremental blocks of ownership for a reasonable, or even conservative, price over several years, each for a promissory note at a reasonable interest rate. Employee purchasers pay down the note balances with some combination of earnings, bonuses and ownership distributions or dividends from the ownership they’ve acquired thus far. After a few years (depending on the company’s ability to produce cash flow) the employee purchaser will own a portion of the company free and clear. During this period the owner usually reduces involvement and delegates more responsibility to the successor owners.

    Stage 2: Assuming the business continues to be profitable, paid-up owners of 30 to 40 percent of a company can present themselves as strong, stable and well-prepared buyers to secure bank financing to purchase the remaining balance of the owner’s stock.

    Following this strategy, Steve’s buy-out plan kept him in full control of his business until he received all of his money. Because he maintained control, he significantly reduced the risk of not receiving full value. He successfully cashed out of his business because he did not wait to begin his Exit Planning until he was ready to leave. By starting before he was ready to leave he was able to choose his successor, exit on his timetable, and leave with the cash he wanted.

    Caveats:

    1.This plan does not work for all businesses, but can work well for companies valued between $500,000 and $5 million.

    2.Executing the plan takes time, usually at least five years to allow the employees to purchase a significant chunk of the company.

    3.This plan requires a cooperative bank aware of the owner’s intentions well in advance of the transfer.
    4.This plan requires a strong management team interested in owning a company financially fit enough to allow most of the available cash flow to be used to pay off the purchase debt.

    Allan VanderHamm, CPA, ABV, CVA, CM&AA, CExP, is a Principal and the Director of Business Transition and Valuation Services at Berntson Porter & Company, PLLC. Allan’s practice focuses on designing and implementing comprehensive owner exit plans, completing successful merger and acquisition transactions, and preparing effective business valuations. If you have questions about the content of this article or any area relevant to Mr. VanderHamm’s expertise please contact him at (425) 454-7990 or avanderhamm@bpcpa.com.

    Related Articles

    Conversation

    Leave a Comment

    Your email address will not be published.

    One response to “Selling a Privately Held Company to Employees”

    1. thomson shaw says:

      Hi. I read your web blog.it is too good. there is so many interesting and important information in your blog .

      Thank you
      Business brokerage firm

    Leave a Reply

    Your email address will not be published.

    More Articles by this Author

    Recent Articles

    Why 2022 is the Year to Buy a Business in the Pacific Northwest?

    Every environment creates business opportunities and challenges.  An unexpected midafternoon summer rain generates umbrella & rain poncho sale opportunities for retailers who previously purchased the now impulsively desired inventory, taxicab & Uber revenue from previously content pedestrians, and unanticipated food & beverage orders between traditional mealtimes for restauranteurs and bar owners from people attempting to…

    Should a Business Owner Grow Organically or Thru Acquisition?

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies…

    The Story of David Shinder (Pedag USA)

    American Dream Achieved IBA, as an approximately fifty-year old business brokerage firm serving the entrepreneurial community of the Pacific Northwest, has been uniquely positioned since before the American Bicentennial celebration of 1976 to witness and hear the stories of thousands of people who have lived the American dream through entrepreneurship creating beloved businesses by employees,…

    Contributing Authors

    Sign Up for Our Newsletter

    Popular Articles Delivered Directly to your inbox