Has your existing employee approached you and shown interest in purchasing your business? Or do you have an employee who knows your business inside and out and could be a potential buyer? Before you proceed down the road of a potential employee buy-out, ask yourself these questions:
- Is the employee prepared to pay fair market value for your business?
- Is the employee someone who you could see running the business down the road?
- Are you prepared to potentially take payment over time?
- Are you prepared to continue to work alongside the buyer until the full buy-out is completed?
Sometimes a structured buy-in can be negotiated, where the employee purchases a percentage of your shares of your business each year, slowly taking over the business.
Of course, there are issues to consider. Even minority shareholders have rights, so you will want to be sure to have a shareholder agreement in place. The shareholder agreement will set out the exact rights, obligations, and roles of the shareholders. You should also consider how you might get the shares back if the employee, for example, buys 10 percent of your business and then leaves or is terminated or the total buy-out as contemplated, is not completed.
The employee likely knows your business and may make the perfect buyer if you can negotiate mutually agreeable terms. It’s worth a look inward to see if a potential buyer of your business may actually be sitting in the office next door. Thinking ahead and planning your exist strategy makes good business sense.
Written by Joanne McPhail and Nahal Golmohammadi