Screening Employees

Consider this scenario:

Yesterday, an employee asked if you were interested in selling your business. He said his two brothers would like to go into business with him. Here’s the problem: he asked if you would sell and for how much. When you turned it around and asked how much he would pay, he simply answered, “Well, how much do you want?”

He doesn’t know you’re selling your business. It is important that information stays confidential since you don’t want your employees or customers to find out. You’ve known him for a long time, but don’t know if he could ever come up with the money. What do you do? 

You have two options:

1. Treat him as any other buyer and acknowledge that your business is for sale. Ask him to sign a non-disclosure agreement and other qualifying documents.
2. Don’t disclose that your business is currently for sale. Ensure the buyer is qualified before you discuss the sale with him.

In this situation, I recommend option 2, which I discuss in more detail in the section that follows. But let’s first take a look at option 1 in case you determine this is more suitable for your scenario.

Discussing the sale with your employees can be one of the most difficult and sensitive issues you will face during the sale process.

Option 1: Treat Them as Any Other Buyer

Even though you already know this potential buyer, you should treat them the same as any other buyer. But keep in mind that this option may alert your other employees that your business is for sale. 

Here are the steps:

• Ask the buyer to sign a non-disclosure agreement.
• Ask the buyer to complete a personal financial statement, which discloses how much liquid cash they have to invest and a summary of their net worth. Note: If the buyer claims they have an investor, the investor should complete these documents as well.
• If the buyer isn’t qualified, discuss their lack of qualifications directly with the buyer. Tell them you can’t release information until you verify they’re qualified.
• If the buyer is qualified, release a copy of your confidential information memorandum (CIM) to the buyer.

Keep in mind, the process for handling this buyer is no different than handling any other type of buyer. The buyer shouldn’t receive special treatment because of their relationship with you. It may be best to handle this process through a third party, such as a business broker or an M&A advisor. 

Your advisor or broker may be in a better position to verify the buyer is qualified. Additionally, because the buyer is your employee, the buyer may feel more comfortable discussing their personal finances with someone other than you.

Option 2: Don’t Disclose Your Business Is for Sale 

Ensure the buyer is qualified before you discuss the sale with them. You have every right to qualify the buyer before disclosing the sale of your business with them. 

In this case, you must handle this yourself if you wish to keep the fact that your business is for sale confidential. If you refer the buyer to your broker, this will clearly signal to the buyer that your business is for sale. 

Rather than handling it yourself, you can have one of your professional advisors, such as your accountant or attorney, verify that the buyer is qualified. Attorneys and accountants are held to high standards, and the buyer may feel more comfortable disclosing their personal finances to them.

The difficult aspect of this process is qualifying the buyer without offending them, which could motivate them to cause damage to your business. 

The key is to approach the process diplomatically. Explain to the buyer that you might consider selling, but not without a significant down payment. You may tell the buyer something to the effect of:

“Let me discuss this with my spouse.”

Come back a few days later and say …

“I have discussed this with my spouse, and we have determined that we would require a minimum cash down payment of $xxx,xxx before we would consider selling our business. If you can demonstrate that you have $xxx,xxx cash to put down, then we would be more than happy to discuss the sale with you.”

Taking this approach allows you to qualify the buyer financially without disclosing your asking price, or without having to commit to a specific number regarding the value of your business.

In most of these situations, an employee looking to purchase your business is not financially qualified, so only consider this if you have no other options.

If the buyer claims they have an investor, talk with the investor directly to verify they’re also qualified. If the buyer claims they will obtain financing from a third party, retain a professional to determine if your business can get pre-approved for SBA financing. If the professional can’t pre-approve your business for SBA financing, it’s unlikely the buyer will be able to obtain financing.

Key Points

• Discussing the sale with your employees can be one of the most difficult and sensitive issues you will face during the sale process. In most cases, employees don’t have the financial wherewithal to purchase your business, and it may be best to avoid these conversations. 
• If questions do come up, it is best to have a prepared, canned response to, “Is your business for sale?”
• Most employees dream of business ownership and may make exaggerated claims regarding their financial resources in order to complete a transaction. Many believe they can find an investor to put up the money. In most cases, these deals don’t happen. 
• In some cases, employees feel they have few other options for going into business for themselves, so they become pushy and demanding. If this happens, don’t cave in to their demands. You have invested years, or perhaps even decades, building your business, and you have every right to protect your investment. 
• Handle this situation with care and diplomacy – it’s possible to ensure your sale remains confidential and that you achieve a successful exit from your business.