When selling a business, owners often neglect to look around them for prospective buyers. In many cases, the buyers for your business may be in the surrounding offices or working with clients or customers down the hall. After all, your employees know the business and you may not have to sell them as hard as an outside buyer.
One of the methods of selling your company to your employees is through an employee stock ownership plan, or ESOP. By paying cash or by having money deducted from their paychecks, employees can buy shares of stock in your company. In this manner, employees become part owners of the business.
Typically, such shares are sold to full-time employees who have worked for the company for at least six months or a year. When employees leave the company they can sell the shares back to the company.
Companies also contribute to the ESOPs by adding additional shares of stock to the plan or through annual cash contributions, which can be counted as tax-deductible. While ESOPs are often too costly for many small businesses to set up, they can be a means for an owner to sell off the business and move on to another venture or even retire. An ESOP is considered to be a type of retirement plan, and is therefore subject to a number of government restrictions and guidelines.
While the eventual goal of setting up an ESOP may be to retire, you can also see short-term benefits from such a plan. With ownership comes empowerment, and employees will usually take greater interest in the company, and the quality of work may improve once employees know they have a stake in the business.
Since an ESOP is difficult to set up, it is essential that you work with an attorney or an accountant familiar with the complexities of such a plan. Check out the ESOP Association for additional information.
Another means of selling a business to employees is by establishing a worker-owned cooperative. In this scenario, workers who are interested in becoming owners all buy into the business together. Such cooperatives are run by employees in a democratic manner, electing a board of directors. The makeup of such cooperatives will vary greatly depending on the number of employee owners and the type of business.
For a small business owner who has neither the funds nor the time to establish an ESOP, a workers’ cooperative may be an attractive alternative. Of course, you must first have enough interested workers to produce sufficient capital to make such a sales plan feasible. However, if enough employees are interested you could reap some tax benefits by selling to them in this manner, including deferring the capital gains you make from the sale.
As worker cooperatives slowly gain popularity, new rules and regulations may be enacted to govern these transactions. Depending on how favorable these are to the seller, you will then be able to determine if this is a good choice for you.