Employee Purchases for SMALL Businesses: A Simpler Method
Perhaps you've read about ESOP. Employee Stock Option Purchase. Generally speaking, businesses with under 15-20 employees might be better off taking a simpler path. Attorney costs come into play for ESOPs along with administrative costs of keeping records, filing reports, sending plan account statements, etc.. A firm of 20 employees end up paying $2,000 to $4,000 per year plus $30 to $60 per employee. As a result, many small business owners shy away from this approach.
There is a simpler option for small businesses.
Because SBA loans favor employee purchases, your own employees are likely to more easily qualify for a loan so the transaction may be as simple as getting them the terms they need for a down payment and/or partial seller financing to qualify for their own loan. Of course, it's important that the business and the owner qualify and will be able to service the debt within the company's current earnings.
Here are some of the benefits of simple employee purchases:
You are confident in their ability to run the business, your legacy: You likely know the person in your company most capable of running the business. It may even be more than one person. If so, that person simply forms their own business entity and you work with someone to define the terms and timing of the transition which can range from months to years depending on how long it takes for the employee to come up with the down payment.
Your team transition more easily vs. an outsider. Many teams are accustomed to seeing the owner/owner and if they've already worked with the new owner, the transition is less jarring to the employees. You do need to manage the feeling around whether the choice was equitable and if any employees will feel resentful if they were not asked by the owner to take over the business.
You retain private ownership. Sometimes an absentee investor will buy a privately owned business and the owner/operator is no longer in the business.
Reduced broker fees: I reduce fees for employee purchases for my clients since it reduces my time normally spent marketing the business to a third party. Instead, my time is spend drawing up terms for the mutual agreement and working with an attorney in a streamlined fashion to file the proper records.
Ask me about how we might work out a simple solution for your business to transfer to one or more of your key employees.