When you are a business owner you must plan ahead for many different things. You need to keep a certain amount of capital in the form of cash on hand, for example. Also, you should anticipate how the market will affect your business so you can anticipate the needs of your customers.
However, there is one thing not every business owner thinks about when they first open a new business. That is an exit strategy.
When you decide you are going to retire or quit your business, you may not have a relative who will carry on the business. Most likely, the next alternative is to sell it.
What happens if you are unable to find a buyer, though, or they can’t meet your price? Should you sell employees stock in your business as an alternative?
How Selling Stock Works
As the business owner, you would create an Employee Stock Ownership Plan, or ESOP. This is sort of like a retirement plan.
The employee may receive company stock as a bonus periodically giving them a small percentage of ownership of your company. The more years they work there, the larger chunk of stock they accrue.
But this isn’t the only option with an ESOP. Employees can also purchase stock from you outright. Since not all employees have cash readily available to do that, they can get a commercial loan to purchase the stock.
The stock itself is usually the collateral for the loan and the purchasing employee would make payments to the bank.
Advantages
Turn over the Business Gradually
You may like the idea of the ESOP option because you can gradually turn over the reins of your company to one or more employees. You phase out of the business as the employees slowly add responsibility.
This method of transferring ownership is easier on both you as the seller and the buyer. Instead of an abrupt cut-off date, all parties can adjust to the changes. Thus, it ensures a smooth transition from you to the new owner.
Business as Usual
Most likely you care about your business even though you wish to sell it. After all, you have put a lot of effort and time into building it. If you are unable to pass the business on to a child or other family member, a staff member may be the next best choice.
Because you trained the employee they are very likely to succeed and continue the business in much the way you ran it. This makes it feel like a win-win to both parties.
For the customer, this means it will be business as usual. They will be able to expect the same or very similar products or services to what they are used to getting.
Disadvantages
You May Not Get Your Asking Price
As with anything, there are disadvantages to the ESOP as well. One is that when you sell to an employee you may still not receive what you really want for your asking price.
Once again, the employee may not be able to come up with enough money to meet your original selling figure.
You Might Have to Help Them Come Up With Funding
One other disadvantage to consider is that you may have to help your employee figure out how they will fund buying your business. If they have never had experience in such matters, you may have to do more than just point them in the right direction.
ESOP Options Take Time
You must start planning a few years ahead of time in order to set up an ESOP. In fact, it can take as much as two or three years. Advance planning may be needed for you to sell your business this way because it can’t be done quickly.
A date would need to be set to start the transfer of ownership as well as a completion date. In between, show your employee the ropes of owning and managing the business instead of just working there.
As you can see, there are several things to consider when deciding if you should sell employees stock in your business. It’s a tough call to make and only you can make it.
