As a business owner contemplating your exit strategy, you will likely encounter a persistent myth in the marketplace: The belief that selling to employees means accepting a lower price for your business. This misconception has circulated through boardrooms and business communities for years, potentially steering owners and advisors away from considering employee ownership as a viable succession option.
However, like many widely-held beliefs in business, this assumption deserves closer scrutiny. The reality of employee ownership (EO) transitions tells a very different story. These are actually market-value transactions that can provide full and fair compensation to selling owners while preserving your hard-earned business legacy. Let’s explore.
Key Beginning Steps for a Sale
Whether you end up selling to outside investors or opt to sell to your own employees, the starting point for the process will be the same. There are two key steps you need to take to prepare your business for sale.
Feasibility Study
This structured evaluation thoroughly assesses your company’s readiness for sale, examining crucial elements that will impact any ownership transition.
Think of a feasibility study as your company’s pre-sale health check. It evaluates essential components, including your organizational structure, financial documentation, and operational stability.
Are the right management teams in place to ensure continued success? Are your financial records thorough and well-maintained? Have you established efficient operational processes that can outlast your departure? These questions must be answered, whether you’re considering employee ownership or a private equity sale.
Without this crucial groundwork, you risk complications that could derail even the most promising succession plan, regardless of who sits on the buyer’s side of the table.
Business Valuation
The next critical phase in any business transition is determining your company’s market value through a professional valuation. This comprehensive assessment determines the true value of your business in today’s market. It’s a fundamental requirement whether you’re selling to employees or external buyers.
A thorough valuation provides more than just a price tag; it offers a detailed analysis of your company’s financial health, market position, and future potential. This objective assessment serves as the foundation for negotiations, ensuring that all parties – whether employee groups or private buyers – understand the true market value of the enterprise they’re acquiring.
Making Critical Decisions
Selling your company is a monumental decision. After you’ve found that your sale is feasible and you’ve determined the business’s fair market value, you will need to weigh your pros and cons when it comes to sale options. While you will certainly not lose value selling to employees, you might stand to make more money from an outside investor.
For example, in certain scenarios, an investor may wish to buy your company as one of many assets they plan to combine. In this case, if your company is valuable to the investor, the price they are willing to pay for your business may be even greater than its fair market value. Therefore, if your primary goal is to maximize your earnings, that could work out in your favor if the conditions are right.
While financial considerations cannot be understated, weigh the intangible costs of your decision. Once you’ve left the organization, your carefully built enterprise may be restructured, consolidated, or fundamentally altered to serve new corporate objectives. This transformation can have a drastic impact on employees’ livelihoods, your community’s economic stability, and the legacy you’ve spent years building.
What value do you place on preserving your corporate culture, protecting your employees’ future, and maintaining your company’s role in the community?
A Seller’s Priorities
The bottom line? Selling your company to employees does not require sacrificing its value. An employee ownership transition is designed to deliver fair market value, providing you with the full worth of your business as determined through a professional valuation.
While other buyers might offer premium prices to certain types of businesses in some industries, consider carefully what other values you might be sacrificing in return. The decision to sell is multifaceted, requiring thoughtful evaluation of both financial and non-financial factors.
Just be sure you have the facts, and don’t fall for the fiction. The North Carolina Employee Ownership Center (NCEOC) can help you navigate your needs and priorities.
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