COVENANT BUSINESS PLANNING SOLUTIONS

Exit Option Two: Sell to Key Employees

In terms of advantages and disadvantages, the sale to key employees is remarkably similar to the transfer to family members. (Recall that Larry’s exit strategy involved a transfer to key employees.) So similar are the two paths that if you substitute ‘key employee’ for ‘family member’, the advantage/disadvantage lists are the same.

The owner who considers a transfer to key employees hopes to achieve the same objectives as the owner transferring to a family member.

  • Put the company in the hands of a known entity
  • Perpetuate the company’s mission or culture
  • Keep the company in the community
  • Allow the owner to remain involved in the company and
  • Achieve financial security

But, the perils of this exit route are also the same as those present in the family transfer;

  • Without planning there is little or no cash at closing available for the owner’s retirement
  • Owner experiences ongoing financial risk
  • Requires owner involvement in company post-closing and
  • Employees may be unable or unwilling to assume the ownership role

Many of these disadvantages can be minimized if owners begin planning this type of transfer well in advance of their departure dates.

In our next blog, we’ll look at the other option that involves an exit plan and employees – an ESOP or Employee Stock Ownership Plan.