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Selling a Business to an Employee Isn’t a Good Idea? Really??

I am always telling my teenagers not to believe everything they read, even if it’s on the Internet!!  So I applied my usual level of skepticism when I read a newsletter in May 2015 from one of the largest business intermediaries in Canada, under the headline “Selling a business to an employee isn’t a good idea”.  The timing of the article was ironic, as I was preparing to attend the inaugural national conference of the Canadian Employee Share Ownership Association, held in Winnipeg.

So I printed out the article and had it in hand, as I steadied myself to hear the owners of about a dozen employee-owned companies talk about their stories. “If this article is correct”, I thought, “it could be kind of depressing listening to how all these companies crashed and burned when their employees became owners”. I quietly hoped that the hotel mini-bar would have something to help steady my nerves.

But the first couple of owners told stories without crashes or burns. In fact, their businesses soared to new heights under employee ownership. There was Gord Peters, President and founder of Cando Rail Services, a national rail services company. “Our committed teams of employee-owners take the responsibilities and opportunities of ownership seriously, ensuring that our company consistently does the best job possible for the customer. The pride, conscientiousness and enthusiasm our employees exhibit translates into service, innovation and quality”. Hmm, must have been a fluke, I thought.

Then came Doug Flynn, CEO of the Flynn Group of Companies, one of North America’s leading building envelope trade contractors. When they started selling stock to their employees, they had 100 staff in 3 offices. They now have 25 offices across North America employing about 4,000 people. Okay, I thought, they have grown pretty fast, but do their employees know how to manage?? “For fifteen years in a row, Flynn has been named one of Canada’s Best-Managed Companies. We are extremely proud to be recognized year after year as a Platinum Member – a prestigious third-party distinction that honours business excellence among private companies”.

The good news just kept coming. From software development to book publishing to bio-sciences, I heard story after story of companies who have thrived under employee ownership. And in every case, the original owners who sold stock to their employees were just as thrilled. As more than one owner explained, “Why should I care if my piece of the pie gets smaller, when it is more than offset by how big the whole pie grows?”

Flying back to Vancouver on Friday afternoon, I re-read the “bad idea” article, reviewed my notes from the conference, and thought about the Value Enhancement and Exit Readiness (VEER) Assessment process that we go through with business owners who anticipate selling their businesses within 5-7 years. And then I relaxed and reclined my seat back into the face of the passenger seated behind me, confident that our clients would be well advised.

There are about eight exit options available to business owners, ranging from selling to private equity firms or strategic buyers, passing ownership to partners or family members, or selling to key managers or employees. By carefully understanding the personal, family and business goals of the owners, analyzing the value factors specific to each business, and reviewing the options most applicable to the situation, we can identify the two or three optimal exit options for that business, and recommend specific actions to enhance the value and sellability of the business in the eyes of prospective purchasers. In many cases, a sale to employees or management might be near the top of the list. Other times, one or more of the other exit options may be a better fit. But there are no general “do’s” or “don’ts” – each situation will depend on the specific circumstances of the business and its owner.

That being said, we believe more and more businesses will be sold to their managers and/or employees in the coming decade. As the wave of baby boomer owners crests, increasing the supply of businesses for sale, the balance of buyers and sellers will start to tip towards a “buyers” market. Many businesses will have trouble finding qualified third party or financial buyers, and will find that internal exit options are their best bets to successfully monetize their years of blood, sweat and tears. As that trend continues, we will be ready to help, bringing owners and their employees together in a business version of “Let’s Make a Deal”. And with Cando Railway, the Flynn Group and other amazing success stories to follow, there is every reason to believe employee and management owned businesses will thrive.

“Exit Options Analysis” is step four of our six-step “Value Enhancement and Exit Readiness (VEER)” Assessment program. For more information, please click here.

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