Selling an employee a share of your company.

Selling an employee a share of your company.

Although it is a tactic that is frequently overlooked, selling an employee a share of your company—or the entire company—can be extremely beneficial to both the owner and the employee. This is possible in many different ways, and there are many different circumstances in which it might be useful.

Because the employee may not be able to purchase the business without the owner’s additional assistance, it is also possible for the owner to negotiate a better price. What Does It Do? This strategy is appealing because it can be tailored to meet the needs of the business, the owner, and the employee.

Work out what both parties need for the deal to be beneficial, and then the negotiation process begins. There are no fixed rules. The fact that the owner will be entitled to a payment in exchange for giving the employee ownership or part ownership of the business is the most important aspect of the transaction.

If the employee does not have the funds or ability to borrow the purchase price, the owner can personally guarantee the loan (in the employee’s name) and a separate agreement that entitles the owner to retain ownership of the business sold if the guarantee is activated. If the employee does not have the capacity to establish their own business premises, the employee can pay the owner a rent and administration fee.

The employee can purchase only one income stream of the business while the owner continues to operate and own the remainder of the business. The employee Here are some examples of how this strategy might work: 1. The owner needs money for personal reasons, and financing is not an option.

For instance, Peter owns three toy stores that do very well in business. However, Peter used a substantial amount of borrowing to invest in a friend’s aged care venture. Peter is having trouble meeting his own debt obligations as a result of the Aged Care Venture’s bankruptcy filing.

The bank is unwilling to lend additional funds because the company had an overdraft. Paul has been a store manager for five years. He has talked to Peter about buying the business or some of it, but Peter hasn’t because he thinks he will sell the whole business when he retires in five years. Peter and Paul haggle for Paul to buy 20% of the business for $50,000.

2. It is difficult to sell the business to an “outside party” because it is so dependent on the owner. However, the business and its value can be transferred from the owner to the employee through a staged process. For instance, Neville offers engineering consulting services to large mining companies. He makes almost all of his money consulting for four mining companies for more than a decade. Daniel is a qualified engineer who has worked for Neville on these contracts for five years (the company also employs one undergraduate engineering student and one administrative staff member). Neville has a retirement plan.

This business is unlikely to be sold to anyone but Daniel. Daniel probably wouldn’t get the contracts on his own without Neville’s help, too.