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The risks of selling companies to employees

An employee of Santander Bank stands in front its headquarters in Boadilla del Monte, near Madrid April 26, 2010.


One of the best parts of writing this column and my books is hearing from you, the reader. So this week, I'd like to turn the column over to your questions. Please use the comments area below to ask about building a company you could sell or to provide a comment you'd like me to address.

Q: "What are the risks involved in selling my business to my employees?"

A: When selling a company to employees, most business owners end up guaranteeing some of the loan the employees use to buy the shares. Your biggest risk is that your employees will not manage the business well on their own and your old business will end up in financial trouble. If the business defaults on its commitments with you as a guarantor of the loan, you could end up owning the business you thought you had sold.

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The larger risk is leaving money on the table. If you do a deal with your employees without shopping your business around externally, you never get the competitive tension and higher multiples associated with having an intermediary (M&A firm or business broker) create a market for your business. In addition, management teams rarely have the money to buy your business for cash so you end up taking a lower price paid over time.

It's a trade-off between the relative ease and smoothness of an employee buyout at a lower multiple, and the disruption for your employees and customers and demand for more arduous diligence associated with selling to an external buyer.

What experiences can you share with this business owner considering selling his company to his employees?

Special to the Globe and Mail

John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine's "Who's Who" list as one of America's most influential business-to-business marketers.

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About the Author
Founder, The Sellability Score

John Warrillow is the developer of The Sellability Score software application . Throughout his career as an entrepreneur, John has started and exited four companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, published by Penguin in 2011. More


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