When contemplating selling your business to inside buyers (typically one or more key employees), the issue of how and when to give up control becomes critical.
You, the current owner, cannot risk giving up control too soon, especially if you are owner-financing at least some of the purchase. On the other hand, the employee(s) buying the company will want to have operational control as soon as possible. Before transferring significant control or actual ownership to employees, consider transferring some of the risks and responsibilities of ownership.
Employees who have never been closely-held business owners may see nothing but the rewards of ownership. They probably were not in the room when you personally guaranteed the business’ debt, skipped a paycheck or two because of tight cash, or agonized over a no-win decision. They probably have not lived through the struggles and sacrifices of ownership. An excellent way to introduce some of the real-world responsibilities of ownership is a One-Way Buy-Sell Plan. In this way, you can share “the insomnia” with your employee-buyer(s).
In this arrangement, enter into a buy-sell agreement with your top employees to purchase the business should you die or become disabled. The agreement is one-way because nothing happens if an employee dies or becomes disabled. Everybody potentially benefits from this tactic. If you are disabled or die, you or your family will receive full payment for the business, and the employees will get the business.
Additionally, the agreement introduces to employees a serious and legally binding commitment—owning a business demands plenty of serious and legally binding commitments. Typically, disability and life insurance are purchased to fund the obligations, just as with a traditional “two-way” buy-sell agreement. Require the employees to pay for some to all of the insurance premiums. This commitment puts the employees’ skin in the game—owning a business requires plenty of skin in the game. If one or more of your key employees will not share in the modest cost of protecting the business and their career options, how comfortable are you that they will be willing and able to purchase the business and make prudent financial decisions once they own it? Some employees who say they want ownership may not be willing to bear the costs and risks that come with the responsibility.
Another benefit of one-way buy-sell agreements is they create an early opportunity to introduce your desire to exit via internal sale without tipping your hand on specific details such as timing. Confidentiality is important, but if you want to sell to these employees, it’s necessary to know as soon as possible if they are willing to buy. By its very nature, a one-way buy-sell emphasizes that you intend to stick around for some time. Otherwise, why bother with the agreement? Approaching employees with the agreement as a risk management tool for today opens the door to a conversation about future exit plans.
To learn more about selling your business to your employees, click the link below to register for our upcoming complimentary webinar: ‘Mission Improbable: The Challenges of Selling Your Business to Your Employees, and How to Overcome Them’