SELLING A BUSINESS

Jul 3, 2022

Why do Business Owners Use a Business Broker to Sell to an Employee?

At Beacon, we’ve been involved in a number of employee transfers through our platform. We’ve spoken with quite a few owners who consider an employee transfer and decide to do a competitive sale process instead. This begs the question, why work with a broker if you’re considering selling to an employee?

The short answer is that a business broker can create a structured process that gets the best result for the owner and avoids the pitfalls that may come with an employee transfer.

How do employee transfers differ from selling your business to a third party?

Employee transfers take more time and are more likely to fail than most owners believe. Why? Most employees do not have management experience. This means they struggle to grasp some of the financial and legal concepts behind a business transaction.

Additionally, based on the industry, many times the employees do not have the same amount of liquid assets as other buyers. As a result, the sales process stretches on as they either negotiate with the owner or chat with family and friends to pull together the cash for a down payment.

Why are employee transfers more risky than selling your business to a third party?

To start, imagine that you’ve spent a month chatting with a third party buyer. He submits an offer, which you negotiate and then accept. Two months later, about a month before the transaction is set to close, he backs out. 

What’s the damage?

Well, he certainly wasted a fair bit of your time and distracted from efforts to either grow the business or find a better buyer. Additionally, he probably cost you a few thousand dollars in legal fees as your attorneys reviewed and redlined the offer documents. Lastly, he may have cost you one or two thousand dollars in accountant fees, depending on how deep he got in financial diligence. 

But, at the end of the day, you still have a strong business and that buyer is gone and in the past.

Now, imagine that you’ve spent a few months negotiating with an employee. The employee took a while to understand what acquiring a business entailed. He or she thought it was unfair that you would charge interest on seller financing. This employee isn’t interested in having a personal guarantee on the business, and he or she has started to become difficult to work with.

As the transaction starts to fall apart, that employee is likely complaining to his or her colleagues about you. They are being less engaged at work and may even decide to quit. After all, “I could just start from scratch.”

How is this different? When an employee transfer fails, more often than not that employee will ultimately quit, and at the very least drag those down around him or her. This means that the business is worth less than before the process started, as you won’t be able to generate as much revenue or provide a starting point for a new buyer like you used to.

How can a broker help an employee transfer?

First, the broker can work with the employee to educate him or her on the business acquisition process. That includes everything from how a business valuation is calculated to what the terms are for various financing. The broker will be your advocate but work with the buyer to set expectations and reduce friction. That allows the employee to bow out at the beginning of the process, if it’s not going to be a good fit, and avoid a lot of the pain down the road.

Second, the broker can help the buyer progress down the journey of buying a business. The broker may have a template letter of intent agreement, and at the very least should be able to serve as a point person handling diligence requests. This allows you, the owner, to stay focused on running the business and not negotiating a sale.

Third, the broker can help the employee arrange financing. Most employees likely do not have many liquid assets. However, the business broker may know local investors interested in participating. The business broker will definitely know the best SBA or conventional lender as well.

Lastly, the broker can help both sides with introductions to various service providers to assist in the transaction. Those providers are key to making both sides have accounting and legal counsel and fully understand the proposed terms ahead of a transaction closing.

Is working with a broker worth it?

Most small business brokers charge a 10% fee. If your business is worth $500K, the broker needs to be able to save you at least $50K in expenses (unlikely) or strike a deal that gets you at least $56K more in asking price (more likely).

At Beacon, we charge a commission upon the successful sale of a business. We offer significant discounts to those selling to an employee. Given our wide range of financing partners and pool of over 300 passive investors, we’re well positioned to ensure that your employee transfer is smooth and you get the best deal for the business you’ve built.

John McCleary

Transaction Advisor

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.