Selling your business to your employees

Selling your business to employees means handing the future to the people who already know it: one or a few managers, a group of employees, or a co-operative. It's often the most natural succession, but it takes two things: a business that runs without you and well-built financing, in which your vendor financing almost always plays a part.

Why your employees are serious buyers

Your employees know the clients, the equipment, the suppliers and the way things are done. An outside buyer will need months to learn what they already know, and the buyer's bank knows it. For you, it's also a way to keep the jobs, the name and the decisions in the region.

But a sale to employees isn't a favor. It's a transaction, with a price, a structure and risks. Two obstacles come up almost every time:

• Financing. Employees rarely have the money to pay cash.
• Leadership. An excellent foreman isn't automatically a good chief executive. Someone has to be able to make the decisions you used to make.

Before choosing this path, compare it honestly with family succession and a sale to a third party. Our comparison of the three options helps you do that.

Three ways to sell to your employees

1. The management buyout

One or a few managers buy the business, often with a financial partner or a bank. It's the form closest to a conventional sale. It works well when you already have an operations or sales director running part of the business without you.

The risk: everything rests on one or two people. If your business already suffers from key employee dependency, that person becomes both the buyer and the risk.

2. The gradual transfer

Instead of a one-time sale, employees buy shares in stages over several years. You stay a shareholder, then a minority one, then you leave. That pace gives the successors time to learn to lead and to build up their equity, while you keep an eye on the business.

An estate freeze can help here. The idea: you exchange your common shares for preferred shares fixed at today's value of the business. The employees then subscribe for new common shares, at a low cost, which capture future growth. Your value is locked in, and theirs grows with their work. The mechanism is well known, but the freeze value, the rights attached to the shares and the effect on your taxes have to be worked out with your tax advisor and lawyer.

3. The co-operative

In Quebec, employees can also come together as a co-operative. Two forms come up often:

• The worker co-operative, which buys the business and runs it.
• The worker-shareholder co-operative, which holds part of the shares, often alongside other shareholders. It's a way to bring a group of employees in gradually.

At the federal level, a more recent vehicle also exists: the employee ownership trust. A trust buys the shares on behalf of the employees, and the price is generally paid over the years out of the company's profits, without employees having to invest personally. The conditions to qualify and the tax advantages attached to it are precise and have changed since it was created. For all three structures, check the current rules with your lawyer, your tax advisor and a specialized organization.

How to finance a sale to employees

The structure usually combines four sources:

1. The employees' equity, even if modest. It shows their commitment.
2. A bank loan, based on what the business can repay.
3. Your vendor financing, which fills the gap. In a sale to employees, it's almost always at the heart of the deal.
4. Specialized partners. The Centre de transfert d'entreprise du Québec, the Coopérative de développement régional du Québec, and funds such as Fondaction or the Fonds de solidarité FTQ support this kind of transfer. Their programs, amounts and criteria change: check which ones exist when you start your project.

The more independent your business is from you, the more comfortable the bank is, and the less you have to lend yourself. That is also why a sale to employees starts years before the signature.

An example in Montérégie

Picture a fire sprinkler installation and inspection company in Saint-Jean-sur-Richelieu: $5 million in sales, 28 employees, a 66-year-old owner with no family successor. Two outside buyers show interest. But his operations director and his inspection manager want to take over, with about ten technicians ready to invest.

The structure they settle on happens in two stages. First, the two managers and a worker-shareholder co-operative buy a majority of the shares, financed by a bank, their equity and a six-year vendor note. The owner keeps a minority stake and a one-year consulting agreement. Three years later, the successors buy the remaining shares at a price set by a formula written down from the start.

Thanks to the two outside offers, the owner could check that his employees' price was in line with the market. Everything here is invented, the numbers and the people. The principle isn't: competition protects the price, even when you'd rather sell to your team.

What derails a sale to employees

• Announcing too early. A sale to employees floated without a plan creates expectations, then disappointment, and sometimes departures.
• Setting the price out of friendship. Too low and you pay for it; too high and the successors, and your vendor note, are put at risk. An independent valuation protects both sides.
• Staying the boss after the sale. If you keep every decision, the team never learns to lead, and the bank notices.

This week

Pick one decision you always make yourself, such as approving a large quote or setting crew schedules, and hand it for a month to the person you see as your successor. Write down what happens. It's the most honest test of the question that matters: can this person lead? Key employee dependency often starts where you least expect it.

The selling-to-employees checklist

1. Who on the team can really lead? The delegated-decision test gives you a first answer.
2. Have the value set by a third party, as for any buyer.
3. Choose the form: management buyout, gradual transfer or co-operative.
4. Sketch the financing: equity, bank loan, your vendor note, partners.
5. Communicate carefully: when you tell the team matters.
6. Have everything reviewed by your lawyer, your tax advisor and, for a share sale, a registered dealer.
7. Keep at least one other option open until signing.

To combine these tools, see how to structure a win-win deal and step 8: sell at the right price.

Do it with a pro

On your own, a sale to employees often turns into years of discussions with people you see every day. With us and our regional partner, the team is prepared to lead, the financing is built with the bank and partners, and the price is checked against the market. See how we help you sell your business.

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