Selling a business to
an employee isn't a good idea

When a business owner begins to think about selling his or her company, it often seems the next owner is right at hand in the form of a trusted employee.

There are a number of reasons, both practical and psychological, that business owners think this way.

Let's look at the practical reasons first.

Selling a business is a long and often arduous process, with complex paperwork and legal/regulatory implications that must be addressed. Business owners often imagine they will be able to skip a few steps in the process if they sell to an employee.

Somehow, selling to an employee seems less complicated and that's where we begin to cross over into the psychological reasons. It's human nature to want to take the route of least resistance.

A relationship -- and often a long-standing one -- is at the heart of selling to an employee. The owner and employee may be friends as well as colleagues.

This can lead to the owner feeling that he or she has an obligation to keep the sale inside the company, particularly if the employee wants and expects it.

Another psychological aspect of selling to an employee involves the natural care and concern a business owner has for the company.

Many years of hard work and sacrifice go into building a business and it can be painful to think of everything passing into the hands of a stranger.

There's a bit of ego at play in this way of thinking.

At some level, the owner imagines the employee will continue to do things the same way he or she was "taught" and that creates a certain sense of control for the outgoing owner.

Given all these compelling reasons, is selling to an employee a good idea? The answer is no.

The reality is that selling your business within the company has no practical advantage.

Business owners should follow the same due diligence they would for an external sale, beginning with an independent valuation of the investment potential of the business.

We have found that if an employee wants to buy the company he or she virtually never expects to pay full market value.

Employees feel they are owed something for having worked at the company, forgetting they were paid for the work. Inevitably, the employee who wants to be the owner feels that if it wasn't for him or her, the company wouldn't have survived.

If the would-be owner is in the sales department, he feels he brought all the customers in the door.

If he's in accounting, he's convinced the company would have been bankrupt years ago without his careful financial management.

The manufacturing person will credit the great product she produces.

Employees not only tend to exaggerate their personal contribution to the overall health of the organization, they may also overestimate their management skills. A key employee who shines in his or her particular area may not have what we call "full circle skills" -- the ability to do everything from negotiating a bank loan, creating a new product, hiring and firing and sweeping floors if need be.

If an employee's offer to purchase isn't acceptable to the owner, there's a very strong likelihood the employee will become so disgruntled and he or she will leave, weakening the company at a critical time.

Even the psychological reasons for wanting to sell within the company are pretty shaky when examined closely. If a business owner harbours the fantasy that nothing will change when the employee takes over, it's time for a reality check. Outgoing owners must understand and accept that no one will ever run the business exactly the way they did. If a business owner has a hard time accepting that, some pre-retirement counselling may be in order.

And while an owner may feel an obligation to sell to an employee, the truth is that he or she is under no such obligation.

As the head of the company, the best thing you can do for your entire staff when you depart is to leave the business in the best hands possible, with an owner or owners who will continue to develop it as a profitable venture.

We advise business owners to sell externally for the following reasons:

• You're more likely to sell the business for its true value.
• It's cleaner as there are fewer personal implications for you and staff.
• There's less chance of breaching confidentiality. For strategic reasons, the fewer people, including employees, who know that your business is for sale the better.
• There's less chance of damange to the company if one or more employees jump ship after an aborted effort to purchase.

Selling your business is a complex process. It needs to be approached with tremendous care and a firm grasp of what's best for the company as a whole.

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