Selling your business to employees

Selling your own business is a challenging process no matter what. It is a complex process that requires careful planning and preparation. The same applies to a sale to an employee, also known as a management buy-out. Even then, a reliable business valuation and a clearly structured sale process are indispensable.

Management buy-out (MBO) versus management buy-in (MBI)

In a management buy-out, one or more employees, often management, acquire the company. The advantage is that they already know the business well. However, the transition from manager to entrepreneur is often a bigger step than expected.

In a management buy-in, on the other hand, external candidates acquire the shares and assume leadership of your company. This means you have a wider selection of candidates and it brings in fresh knowledge and new impulses as well.

Opportunities and challenges of selling to employees

By selling your business to staff members, you ensure the continuity of your company, which is often positively received by staff, because significant changes in company culture, processes, and structures are not anticipated. The long history with the staff also minimises the risk of losing scarce skilled workers or valuable management experience.

However, this familiarity can become a disadvantage. Emotional attachment and an internal focus could hinder necessary improvements and thus growth. Another stumbling block for employees wanting to buy the company is financing. Often, the business itself does not suffice as collateral for a loan if the forecast does not show a clear increase in value. Additionally, financiers view the fact that employees typically lack entrepreneurial experience as a risk.

Checklist for a successful management buy-out

There are many factors to consider when selling a company to employees. We have listed the main focus areas in an internal transfer for you:

Assessing entrepreneurial skills

Someone who has earned their stripes as a manager for years may struggle as an entrepreneur. It is therefore important to realistically assess someone’s entrepreneurial potential. Ultimately, everyone involved wants the business to be successfully managed after the transfer.

Arranging financing

This is usually the most challenging hurdle in a management buy-out. Employees rarely have the financial means themselves. Therefore, banks or investors need to be convinced to provide financing. The buyer thus enters into long-term and serious financial commitments.

Conducting due diligence

A thorough due diligence is also necessary for a sale to an employee. This is the best way to uncover risks and verify the value of a business. A due diligence investigation includes financial, legal, and operational aspects and forms the basis for the final valuation, negotiations, and eventually the binding purchase agreement.

Planning integration and transfer

It is advisable to consider early on whether you prefer to withdraw immediately or gradually. You will likely make the transition easier for the new management if you remain available as a contact person for customers, partners, and investors.

Determining the sale price

There are various valuation methods to determine the value of a business. The most common are income-based valuation methods such as the discounted cash flow method (DCF) or the earning capacity valuation method. These methods are based on the future profits of the company and provide a good basis for determining the value.

For an estimate of your business’s value, feel free to fill in our Marktlink Multiple free of charge and without obligation.

Success with the right strategy

Choosing the right successor is a crucial step. Which succession is right for you depends on your personal wishes and ideas for the future of the company. However, there is also an emotional component in selling the business to an employee. We tend to prefer someone we know well. Nevertheless, it is important to be honest with yourself and ask whether your preferred candidate is not only professionally competent and a good cultural fit but also has the potential to lead the company successfully.

Especially when making important and emotionally charged decisions, it is important to rely on advice from experienced professionals. External experts provide clarity and help you structure the sale process, determine the value of the business, minimise risks, and conduct negotiations. They also offer valuable assistance with financing issues.

Professional advice from Marktlink

Selling a business to an employee requires careful planning and preparation. From assessing candidates to determining the sale price, thorough due diligence, managing the process, minimising risks, and raising financing – expert advice will pay off.

To navigate the sale process confidently and achieve your goals, you can rely on the expertise and objectivity of Marktlink. With over 25 years of experience, our specialists are happy to help ensure that selling your business to an employee becomes a lasting success for you, your business, and your successor. Contact us now for a consultation, without obligation.