Why You Shouldn’t Sell Your Business - Family business | KPMG | JM

Why You Shouldn'€™t Sell Your Business to an Employee

Why You Shouldn't Sell Your Business to an Employee

When it comes time to move on or retire, it might seem like the most logical progression is to sell your business to a loyal and invested employee, rather than a stranger. In reality though, selling the business to an employee might be more complicated than expected.

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The temptation to sell in-house

There are many reasons why a lot of business owners are tempted to simply sell
the business to an employee, namely:

1. The friendship that exists between the employer and the
employee.

If an employee has been loyal and trustworthy over the years, and a friendship
has developed, then it might not only seem like the most natural conclusion, but
also an expected progression to hand over the business to the employee.

2. Selling in-house can give the seller a degree of control.

By selling the business to someone who has been trained under the current
leadership, a business owner can believe that the company will continue to be
run in a similar vein to how they managed it. 

3. Selling to an employee could mean less paperwork and hassle.  

Many business owners are very tempted to sell the business to an employee for
the reason alone that it could mean they don’t have to do as much due diligence
as the seller. An employee already knows the state of the business and the
seller could be tempted to use this fact to create less paperwork for
themselves. 

The pitfalls of selling to an employee

Unless there is an employee within the business who is a very good candidate, rather refrain from selling in-house, for these very simple reasons: 

1. An employee may expect a special deal.

Purely because of the relationship that exists between the business owner and the employee, as well as how much the employee feels they have already put into the company, they may be more likely than not expect to pay less than market value for the business. 

2. An employee could be good at their current job, but are they a leader? 

When employees have been with a business for a long time, they can start to think that they are fully capable of running the place, but in reality, they may not be adequately prepared to take over all the responsibilities and tasks needed to keep the business running successfully. So far the employee has only been tested in positions under the employer, and might not actually be up to running the entire business. 

3. Negotiations could result in the employee leaving. 

If the employee’s buying offer is not accepted by the seller, or if the business owner’s asking price is too high, then this could lead to bad blood, and result in the employee leaving the business. This not only means losing a valuable employee, but also losing them at a critical time for the company, when the business should be putting its best foot forward. If the employee’s buying offer is not accepted by the seller, or if the business owner’s asking price is too high, then this could lead to bad blood, and result in the employee leaving the business. This not only means losing a valuable employee, but also losing them at a critical time for the company, when the business should be putting its best foot forward. 

Interestingly, selling to an outsider can actually be a much simpler and clean cut process. A business owner can ensure that they get the market value for the business, without feeling like they are letting down either themselves or their valued employee. Another very important reason for selling out of the business is to keep the sale confidential. The less people who know that the business is up for sale, the better, and that tends to include the employees, who could make rash decisions if they think the company is in trouble. 

Ultimately, when selling your business, you need to first and foremost evaluate what is good for the company itself. This is the starting point off which you should make all your decisions moving forward with the complex decision of selling. 

Source: http://www.robbinex.com/voice08.php

 

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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