In some cases, business owners consider selling to employees rather than selling to third parties. A sale of business to employees may take the form of a sale to management (management buyout) or in the form of an employee stock ownership plan (ESOP). We guide our clients through the process of negotiating for a sale, the closing of a sale, and the post-closing procedures involved in the sale of business to employees.
A sale to management has advantages and disadvantages. For example, some advantages are that employees have greater familiarity with the business; they may also have a limited need for full representations and indemnities. Moreover, selling to an employee increases the chances of retaining employees; and seller can maintain control over the process. Some disadvantages are that selling to employees often creates distractions and an adversarial relationship. Employees often lack financial resources and business deals experience. There is also the chance of employee defections and difficulty in simultaneously marketing to third-party buyers.
Financing may be the primary concern in selling to employees. Generally, employees do not have the financial resources to complete an acquisition without some form of third party financing. In these cases, sellers can explore three types of financing structures for an employee buyout. These are: seller financing, employee stock option plan (ESOP), and a financial sponsor.