Looking to sell a business. Purchasers are employees. Traditional financing options (bank, SBA) have some negative aspects (for both). I’m not crazy about self-financing the deal, but would consider it. Other than just carrying the note, what are some other common considerations? Retaining a share of profit over a certain amount? Other ideas to incentivize early payment?
You must log in or register to comment.
What is your opportunity cost if you have to take the business back?
If you sell to employees and the business doesn’t make it…your out. I think most would advise you to sell the business before transfer of ownership.
There are definitely some solid alternatives to straight up self-financing this employee buyout.:
One option is a seller take-back loan, where the employees pay you back over time. This gives you some cashflow while also being flexible for them.
Another idea is tying the purchase price to future performance through earnouts. This incentivizes growth, so you get more money when business is booming.
Keeping a small piece of the pie and getting profit sharing is a smart move. You get the upside without having full control.
A vesting structure could also work, where employees gain bigger equity chunks over time. This reduces risk on your end and gives them more reward as they hit goals.
If you want a smooth handoff while still generating income, you could manage the transition for a consulting or management fee.
Deferred compensation is another option, where you spread out your proceeds over an agreed timeline. This can also help with taxes.
There are plenty of ways to approach this situation. The right creative financing solution depends on your needs and risk tolerance. But the good news is, you have options beyond just self-financing.
Self financing in this market helps get you the higher end of the valuation and structured properly can limit your downside.
What would be a negative for you as an owner for your employees to finance with a bank? You can carry a note for 7.5% of the purchase price and they can buy with just 2.5% down (assuming SBA financing).
I don’t think they can get traditional financing.
If the bank isn’t comfortable financing them, it seems risky for you to be the bank. You’ll want to engage counsel and your CPA if you are serious about carrying the note for the purchase.
Business broker here.
Make an SBA loan your first choice if you can. I recommend contacting Live Oak Bank and Huntington Bank. They are national lenders that are good about lending on blue sky rather than just asset value.
You could also blend the sale with SBA and seller financing. As of August of this year, you may also retain a portion of the equity. By doing so, you might be able to bypass a down payment from your buyers making it easier for them to purchase.
Messaging for follow