Selling a share of your business (or the entire business) to an employee is often overlooked as a strategy, yet it can be very beneficial for both the owner and employee. There are many different ways this can be achieved and different situations where it might be beneficial. It is also possible that the owner can negotiate a better price as the employee may not have the capacity to purchase the business without the owner’s added assistance.

How does it Work?

One of the reasons why this strategy is attractive is that you can tailor it to meet the requirements of the business, the owner and the employee. There are no fixed rules, work out what both parties need for the deal to be beneficial and it’s a negotiation process from there.

The essential part of the transaction is that the owner will be entitled to receive a payment in return for giving the employee ownership or part ownership of the business.

The following variations can exist

If the employee does not have the funds or the capacity to borrow the purchase price, then
the purchase price can be paid over a number of instalments
the owner can personally guarantee the loan (in the employee’s name) and a separate agreement which entitles the owner to retain ownership of the business sold if the guarantee is activated
If the employee does not have the capacity to establish their own business premises then the employee can pay a rent and administration fee to the owner
The employee may purchase only one income stream of the business (and the owner continues to operate and own the remainder of the business)
The employee may purchase a share of the entire business (which could be Stage one of a number of stages to acquire the whole business)
What situations would it be beneficial?

Some examples which would suit this strategy:

1. The owner requires cash for personal reasons and financing is not an option

Example

Peter owns 3 toy stores which are trading very well. However Peter borrowed heavily to invest in an Aged Care Venture recommended by a friend. The Aged Care Venture has filed for bankruptcy and Peter is struggling to meet his debt obligations personally. The business operated an overdraft and the bank is not willing to lend any additional funds.

Paul has been a store manager for 5 years, and has previously spoken with Peter about purchasing the business or part of the business, but Peter had declined as he felt he would sell the entire business when he plans to retire in 5 years.