Listed in: Selling & succession

The process of selling your business to employees

If you’re considering selling your business to employees as an exit strategy, find out how to help make the transfer easier.

3 minute read

Finding the perfect person (or people) to buy your business isn’t always an easy job. But they could be sitting next to you. More often than you think, key employees are buying the businesses they work in – partly because they have an intricate understanding of how the business works. It’s more common in niche businesses, where it’s harder for someone outside the industry to walk in without having the specific qualifications or know-how.  

Advantages of selling to employees

An employee buying your business can save you time and effort explaining to someone what the business is about, and the opportunity ahead.

Other benefits

• No need to advertise the business for sale and disclose confidential information to an external third party.
• Continuity for customers.
• Business as usual for suppliers and staff.
• You don’t need to train a new owner on how the business runs.

Having an employee buy the business could also help prevent competition. It’s a sure-fire way of keeping key employees engaged in your business and enabling them to share success.

One last point: you could allow an employee to buy part of the business (as a minority or majority owner). It’d release capital for all your hard work, while still enabling you to contribute to future growth.

What to avoid

You may feel uncomfortable sharing everything about your business to an employee, especially how much money you’re making. A worst-case scenario is going through the process and at the final hurdle and the sale not happening. You could then have an employee with information you may not have wanted them to know, or they leave and go to a competitor with your trade secrets.

To make it easier to transfer ownership, you could:

• agree on a price early so there’s transparency
• check the employee can raise capital
• manage other employees who may feel left out or unhappy
• set a transition date.

If the employee or group of employees are unable to secure the financing required to give you a clean exit, you’ll probably be asked to leave some money in the business until they can afford to pay. It’s worth deciding on this before negotiations start.

Steps to selling

To make it easier for an employee to buy the business, it’s often a good idea to set up a formal process and consider engaging a third party (like your accountant or professional adviser) to help with the negotiations.

A useful process would include things like:

• allowing them to conduct due diligence (investigating everything)
• providing past financials
• valuing the business and agreeing on a sale price
• assignment of leases and agreements (especially employee contracts)
• if you’re buying the net assets or company shares
• any contingent liabilities: loans, promises, agreements that may continue after the sale).

Similar to selling to someone from outside the business, you’d probably want to release information as you go to check the employee is still keen and has the capacity to buy the business from you.

Having employees buy in over time – the Employee Share Scheme (ESS)

The ESS allows a business owner to sell the business to qualified employees instead of a single buyer. This is sometimes referred to as an Employee Stock Ownership Plan (ESOP).

You can grant shares to employees as part of a job performance initiative, offer employees the chance to buy shares, or have the cost of shares deducted from their wages (or bonuses or profit-sharing money). There are possible tax implications so obtain tax and financial advice before you do this.

Read more about Employee Share Schemes in this detailed guide from KPMG, and the Employee Ownership Association for Australia and New Zealand website.

Preparing for a smooth transition

It’s worth making sure the transition is as smooth as possible, so you might want to let the new owner-employee shadow you for a period of time to see how you work. If you can, work together on projects, meet key suppliers and customers, introduce them to your banker, accountant, and anyone else that is crucial to business success.

Selling your business to a trusted employee or team can give you added confidence that you are leaving it with someone who knows your business. And while you might not get the same price as you would on the open market, that’s something you can balance against a smooth exit that’s well been well thought-out.

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This article is solely for information purposes and is not intended to be financial advice.  If you need help, please contact BNZ or your financial adviser. Neither BNZ nor any person involved in this article accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.

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