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Selling to Employees 

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Business > Ask an Expert

Selling to Employees

Tips on advising clients as to whether or not a management buyout is a good option.

When it comes to selling a business, most sellers have visions of a quick and easy sale. But in reality, most businesses sell for less money and in more time than the owner anticipates. A little foresight, however, can improve this scenario.

There are several ways a business owner can transition out of ownership. For those willing to invest a little effort up front, a management buyout (MBO) could be a great option.

With a management buyout a company’s existing managers acquire the business from its owner. Because managers are typically people who know and appreciate the business, MBOs boast the highest success rate of any type of business sale, at 80 per cent. By contrast, the success rate of inter-family succession is a surprisingly low 32 per cent, according to the Canadian Association of Family Enterprise.

Considering that finding a buyer is the hardest part of selling a business, an MBO eliminates this big obstacle right away. Another benefit is that ownership can be transitioned over time, so if the current owner is not ready to give up full control of the business all at once, shares can be sold to key employees in stages. This also serves as a tremendous incentive for attracting and retaining key employees.

Commercial lenders often prefer financing MBOs to other forms of acquisition, but if the buyer is unable or unwilling to write a cheque for the full price of the business, a vendor loan may be required to complete the deal. If the quality of the management team is high, it’s more likely that the business will survive to repay the loan; another critical point if the seller wants to stay retired. In addition, because the management team may have a greater understanding of the growth potential of the business than an outside buyer, the buyers may be willing to pay more for the business.

Of course, the MBO option isn’t entirely a bed of roses. In some cases, the employees who are interested in buying the business can’t afford to do so. Or, they may lack certain ownership skills such as a solid grasp of the company’s financials. And, in some cases, employees may have difficulty making the transition from co-worker to owner/boss. We encounter issues like this daily at Wardell and have found that training, culture, and systemization can go a long way toward resolving these problems – ideally while the business is still under the current owner’s control. The trick is to get employees operating as independently as possible before the owner leaves.

If a management buyout sounds like a good option for your client, I recommend advising them to begin implementing this structure in stages. If at all possible, your client should begin planning for succession years in advance of selling shares to employees. Then they should strategically and gradually transition leadership by steadily passing authority on to others over time. A well-planned succession, MBO or otherwise, will give the company its best chance to thrive in the future.

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