Should I Sell To My Employees?
Posted by estevens@stark-knoll.com
Thursday, August 05, 2010 4:20:56 PM
Most, if not all owners think about a possible sale to their employees. If this statement is true, then it begs the question as to why there are not more transactions done with employees? Some of the answers or a combination may be:
- the employees are not sufficiently trained to take on running the business
- employees are not motivated to take on the responsibilities of being an owner
- employees do not have the cash or loan capacity to pay the asking price
- the owner is faced with accepting seller’s financing and taking a subordinated position
- employees are much more cognizant of the company’s pitfalls
- the owner lacks confidence in or simply-does not like the employee(s)
- the selling price trends to be less than with a third party
However, there is one method that makes the sale to employees very attractive. That method is through an Employee Stock Ownership Plan (“ESOP”). The major benefit is taxes-both to the company and to the owners. The tax benefit to the company is an increased debt capacity and the benefit to the owners makes it easier to for them to take a lower price. This results in a net cash transaction comparative to a third party sale based upon acquisition value as opposed to Fair Market Value. An ESOP purchase is a complicated and expensive transaction requiring knowledgeable advisors. One of those advisors, if the transaction value exceeds $10-15 million is a brokerage firm that has the means to defer taxable gains.