I often counsel entrepreneurs on the way up -- when their fledgling businesses are looking to grow and they need financing to help accomplish that.
But I sometimes work with entrepreneurs on the other end of the spectrum. These are the businesspeople who are looking to cash out, yet want to ensure their legacy as much as they can.
That might mean selling to an employee or group of employees, a process that, when completed correctly, can work out favorably for everyone.
Here's a recent example that can serve as a case study: I met with a client who was in his late 70s and had built his business from scratch. He was looking to retire. He had no children, so there was no obvious heir.
But he did have a trusted employee who had worked with him for 20 years. The entrepreneur was considering selling the business to that employee, but wasn't certain how to accomplish that -- or if it was even a good idea.
I assured him that a sale certainly was a possibility and that selling it to a valued employee had its merits.
Selling to an employee is a way to secure your legacy.
Let's start with the idea of selling to an employee. It's the perfect way for a longtime owner to transition into retirement. Depending upon the arrangements made, the owner can remain aboard as a consultant for up to a year and offer insight as needed. There's no need for a hasty departure.
Meantime, the employee-turned-owner probably considers his former boss a mentor and will readily seek advice. Contrast that with an outsider buying the company and possibly taking things in an entirely new -- and potentially bad -- direction.
Of course, there's no guarantee the employee will be able to permanently safeguard your legacy, but it's reasonable to assume the odds are better than if a newcomer takes over.
When it comes to financing, there are options.
Now let's talk about the financing part.
As usual when it comes to small to mid-size businesses, the federal Small Business Administration (SBA) is your friend, specifically its flagship 7(a) program. When it comes to selling your business, up to $5 million can be financed over 10 years, usually with relatively low interest rates and generous repayment terms. And even if the employee doesn't have the required 10 percent down payment, the owner can carry a note.
Note that the seller can't retain any residual ownership and can't continue as an employee or board member after the sale.
If you want to sell the company to all your employees instead of just one person, an Employee Stock Ownership Plan (ESOP) might be your best bet. Those plans are commonly considered a workforce benefit, with employees receiving ownership stakes as part of their compensation. Those shares are held in trust until the employee departs.
These are just two options for selling a business, so each would-be sales unique circumstances requiring a thorough exploration of other options. Never settle for the first proposal presented to you.