Sale of business to employees.

• Author: Bissonette, Laurie
• Position: NEWS

In the next few years, your businesses may transition to a different owner. Aside from passing on the business to a family member, you may also want to consider selling the business to your employees. Not only do employees sometimes share the entrepreneur's vision and passion for the business, their experience means they may also understand the strengths, weaknesses, and opportunities in the business and market. In addition, the other employees may already know and trust the successors you choose, so there is less fear of change and an opportunity to make a smooth transition.

That does not mean that this type of sale is without drawbacks. Employees may not have the cash flow or credit necessary to fund a straight buyout and, in many cases, the entrepreneur ends up financing the sale. Selling the business to your employees could also create conflict if other employees feel that they have been passed over or if they do not accept the successor. This can lead to internal power struggles and turnover which can be detrimental to the business. The successor's leadership and management skills may also require development, as a good employee does not necessarily always make a good leader.

A sale to employees requires a little bit more flexibility, but some advance planning can provide you with some tax-effective solutions. Some sale structure options are as follows:

The business finances the sale

The future owners can purchase the assets or shares of the company from the seller through a holding company The new owners can then use inter-corporate dividends from the business to repay the previous owner. Typically, this would involve leveraging the business to fund the buyout. You may need professional tax advice for this option, as an improperly structured transaction may result in significant tax consequences.

The owner finances the sale

In some cases, the seller will accept a delay in receiving the proceeds...