Pros and Cons of Selling Memberships in Your Business
If you have a successful business you may assume that when you decide to retire you will simply sell it to someone else. But what happens if you aren’t able to find a buyer?
Obviously that is not a problem for every business owner. Some have family members ready and willing to take the reins. However, if you don’t have someone lined up to take over or waiting in the wings to buy it, what are your other options?
One is to sell memberships in your business. But, as with many things, there are both advantages and disadvantages of selling memberships in your business.
How it Works
You can create an Employee Stock Ownership Plan, called an ESOP, to allow you to sell shares. Or, you can give some shares to employees as part of their benefits.
For example, business owners give employees a small portion of company stock as a bonus. How much stock they are allotted depends on the number of years they have worked for the business.
The other option is for employees to buy stock from the business. If the employees do not have the cash on hand to make the purchase, they can get a commercial loan to complete the acquisition.
Understandably, the bank may require collateral for the loan. But generally the actual stock becomes the collateral needed and the buyer then would make payments to the bank just as they would with any other loan.
Advantages of Selling Membership
Gradual Change of Management
The ESOP offers advantages to you as a business owner. One advantage is that you can make a gradual change in the management of the company instead of an abrupt one by simply selling it.
Under an ESOP you would slowly give duties to the new buyer, or buyers. The slowed turnover allows them to fully learn what they need to be successful as they transition from employees to managers. Sellers and buyers alike are happy with this type of arrangement because it is easier on both.
Less Disruption of Business
Even when you want to sell your business you still care about it. You don’t want to feel like you built it up for someone else to take control and run it into the ground. Selling to an employee in the business, therefore, can be a great alternative to passing it on to someone who won’t run it well.
Having trained your staff they are more apt to continue running the business in the same manner and traditions that you did. Everybody involved in the sale wins and feels good about the changes that way.
Customers of the business tend to be less nervous with this type of change in management also. They notice less disruption of business, are happier, and continue their loyal patronage as a result.
Disadvantages of Selling Membership
Lower Selling Price
There are disadvantages to selling memberships in your business too. For instance, you may not receive the price you’d like when selling to employees instead of others.
Your staff member may have trouble getting the funds together to buy the business. This may lead to you stepping in to assist them with finding the funds to make the buy.
When they have not had the experience of buying a business it may not be as simple as just telling them who to talk to. It can be a time consuming experience for both parties.
ESOP’s are not quick to set up. If you think you will be selling your company in this manner, you have to plan ahead at least a couple of years to make it happen.
You’d have to set a target date for the completion of the sale as well as to start the transfer of ownership. In between you would train the new owner or owners on management of the business.
There are both advantages and disadvantages of selling memberships in your business. You should consider the ones listed and talk to your accountant, tax preparer, and business lawyer before deciding that this is the right option for you.