M&A Guide | Selling Your Business to Employees

Executive Summary

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

He doesn’t know we are actively selling our business. We want it to stay confidential since we don’t want our employees or customers to find out. I’ve known him for a long time, but I don’t know if he could ever come up with the money. What do you suggest?

You have two options:

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

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

#1 Treat Him as any Other Buyer

Even though you already know this potential buyer, you should treat him 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:

1. Ask the buyer to sign a non-disclosure agreement.
2. 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.
3. If the buyer is not qualified, then discuss their lack of qualifications. Tell them you cannot release information until you verify they are qualified.
4. If the buyer is qualified, release a copy of your confidential information memorandum (CIM) to the buyer.

Note: The process for handling this buyer is no different than handling any other type of buyer. The buyer should not 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.

#2 Don’t Disclose that 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 had 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 the business is not financially qualified, and you should only consider this if you have no other options.

If the buyer claims they have an investor, then you should talk with the investor directly to verify they are also qualified. If the buyer claims they will obtain financing from a third party, we recommend retaining a professional to determine

if your business can get pre-approved for SBA financing.
If the professional cannot pre-approve your business for SBA financing, it’s unlikely the buyer will be able to obtain financing.

Summary

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 do not 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 may feel as if they have few other options for going into business for themselves, so they end up becoming 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 that investment.

Handle this situation with care and diplomacy — it’s possible to ensure that the sale remains confidential and that you achieve a successful exit from your business.