Selling to your employees, and why it usually falls over
It is the outcome many owners want: hand the business to the people who built it. Here is why it fails more often than it succeeds, and what has to be true for it to succeed.
General information only, not financial, legal or taxation advice. Tony Pope holds Queensland Office of Fair Trading licence 4963575.
The short version
- The obstacle is almost never willingness. It is that employees rarely have a deposit or security a lender will accept.
- Vendor finance is how these deals get funded, which means you are still exposed after settlement.
- A good operator is not automatically a good owner. Those are different jobs and one of them involves risk.
- Test it early and quietly, because a failed internal approach can make the business harder to sell to anyone else.
It is one of the commonest things owners say when they first start thinking about an exit. I would like the staff to have it. They built it with me. I would rather it went to them than to some buyer who does not understand it.
That is a decent instinct and it is worth taking seriously. It also fails more often than it succeeds, and it fails for reasons that are predictable enough to check before anyone gets their hopes up.
The obstacle is money, not willingness
Ask an experienced employee whether they would like to own the business and you will often get a yes. Ask them to find a deposit and give a personal guarantee to a bank and the conversation changes.
The person who is best at running your business are frequently the people who have spent their working lives on a wage. They may not own a house, or they may own one with a mortgage that leaves nothing to secure against. A lender assessing them will look at security, not at how good they are at the job.
This is not a criticism of them. It is arithmetic, and it is the single commonest reason these deals do not proceed.
Which means vendor finance
Where an internal sale does happen, it is funded in part by you. The buyer pays what they can at settlement and the rest over a period, secured against the business and often against them personally.
Be clear about what that means. You have not finished selling. You have swapped a business you control for a debt owed by someone running that business without you. If the business struggles, your money is at risk, and the person who owes it to you is the person whose decisions caused it.
That can still be the right deal. It is often the only deal available. But it should be entered with the same care you would apply to lending several hundred thousand dollars to anybody else, because that is what it is.
Practical protections worth insisting on:
- Security over the business assets, properly registered.
- Personal guarantees, with an honest assessment of whether they are worth anything.
- Reporting obligations so you see the numbers monthly, not annually.
- Step in rights if payments are missed, and a clear definition of what missed means.
- Restrictions on drawings while the debt is outstanding.
Operator is not owner
The second reason these deals fail is subtler. Your best tradesperson, your best salesperson, your operations manager, whoever the obvious candidate is, has been excellent at a job that has a boundary around it. Ownership does not.
Owning means quoting when you are not sure, carrying the wage bill in a slow month, dealing with the bank, chasing a customer who owes you and deciding what to do when two good options cost the same. It also means going home worried in a way that being very good at your job does not.
Some people move across that line easily. Many find, once they are exposed to it, that they liked the job more than they want the risk. Better to find that out through an honest conversation than three months after settlement.
The disclosure problem
An internal approach carries a risk that an external sale does not.
If you tell your operations manager you are thinking of selling, and it goes nowhere, you now have a senior employee who knows you are leaving. That knowledge tends not to stay still. Other staff notice a change. Customers hear something. Sometimes the person you approached resigns, because they have concluded the business is in play and they would rather choose their next move than have it chosen for them.
So the sequencing matters. Work out privately what you would need the deal to look like: the number, the structure, how much you are prepared to carry, over how long. Only then have the conversation, with one person, and only if the answer would actually work for you.
What has to be true for it to work
In the ones that succeed, these are present:
- The candidate has been in a genuine decision making role, not just a senior operational one.
- There is a deposit, even a modest one, because contributed money changes behaviour.
- The business is not dependent on you in the way it is dependent on them.
- The price is realistic, which sometimes means less than an external buyer would pay.
- There is a written agreement drafted by solicitors, not a handshake between people who trust each other.
That last point does the greatest damage when ignored. These deals are done between people with a long relationship, and it feels wrong to lawyer it up. It feels considerably more wrong two years later when the payments stop and nobody wrote down what happens next.
The honest version
Selling to your people can be a very good outcome. It preserves the business, it rewards the people who built it, and it is often the thing an owner wants above everything else.
It is also the deal with the highest chance of leaving you unpaid, because the funding is yours and the risk stays with you.
Test it early, test it quietly, and price the risk properly. If it works, it is a fine way to finish. If it does not, you want to have found that out before anyone else knew you were asking.
Common questions
Can I sell my business to my staff?
Yes, and it happens. The common structures are a straight purchase, a purchase funded largely by vendor finance, or a staged buy in over several years. The difficulty is rarely interest and almost always funding, because employees rarely have equity in a house or the deposit a lender will want.
How is an employee buyout usually funded?
Usually through a combination of a modest deposit, bank finance where security is available, and vendor finance from the seller. That last part is the one that decides whether the deal is sensible for you, because it means part of your price depends on the business continuing to perform under new management.
Should I tell my staff I am thinking of selling to them?
Carefully, and usually not first. An approach that goes nowhere can unsettle people, prompt resignations and reach customers. Have a quiet conversation with one person if there is an obvious candidate, after you have worked out what you would need the deal to look like.
Keep reading
All notes on selling a business · All seller guides · What is my business worth?
Check it yourself
Primary sources, none of them affiliated with me and none of them endorsing this site. Where anything here differs from an official source, the official source is right.
Links open on external government and industry websites. The full list sits on licensing, registers and official sources.
Ask what it is worth
Free, in writing, and nobody finds out you asked. Tell me the trade and the suburb and I will do the rest.
Nobody finds out you are selling. This goes to me only, into my own database in Sydney. I will not contact your accountant, your landlord, your bank or your staff, ever, unless you ask me to.
If you would rather not put anything in writing yet, ring 0431 124 128. Prefer to pick a time yourself? Book a time in my diary.
Thinking about selling?
Thirty minutes, on the phone or in person, at a time that suits you including evenings. You will get a straight read on where the business sits today and what would move the number. It costs nothing, there is no obligation, and nobody finds out you asked.