This article are provided for information purposes only, and are not intended as legal advice.


Buying your employer’s business

June 2nd, 2009

You have worked in your current company for many many years and the owner has no heirs who are interested in the business.  He is getting on in age and has no immediate plans to retire.  What do you do?  How do you approach your boss and say, can I buy the business over time?  That will allow the boss to continue to work and will allow a smooth succession.

 

Many entrepreneurs have been so involved in their business that they have never acquired any hobbies.  Their entire life is wrapped up in the business.  I met a business owner many years ago.  He was 79 and thinking of retirement.  A child of his had passed away a few years before and he was thinking of retiring.  His accountant was 80 and he was retiring and he was a trusted friend, so he started to contact many people about his business. It became clear that he really did not want to sell the business, he wanted to know what the value of the business was to see how well did he building a business.  He worked 6 days a week and he would never let go of his business until he died.    Another business owner has several sons in the business and he never wanted to talk about succession planning.  Finally after 25 years, he finally decided to do some tax planning.  If he had done the planning many years before, he would have saved considerable amount in taxes.  He was lucky, his elderly wife was in good health and they were able to purchase life insurance on the 80 year old wife to pay the taxes due on the transfer of assets to the kids.  Succession was finally done but this was costly.

 

Many business owners do not want to retire but if you asked them if you could do a creeping takeover.  Start at 10% ownership, pay for it out of your share of earnings, then once that is paid, buy another 10% etc until you eventually have control.  You may need to still give the old owner control of certain aspects of the business and allow him to work as long as he wants.  If you make the rules too harsh, he may not want to sell you anything at this time and my wait until he is ready.  In this case, you will have to look at the most tax efficient way for the old owner of the business to receive the proceeds on the sale of the business.  Remember, he is interested in two things, how much is the business worth (that is an ego issue) and also how much money does he get to keep.

 

The problem that you will encounter is now that you own 10% of the business, what happens when you start to bring in more business, the value of the company goes up in value, do you have to pay him more for his share of the business when the growth and additional value in the business is purely attributed to you?  This is a key issue which you need to negotiate.  Do you value the business today at a set value and use that as the valuation for the entire creeping takeover?  What happens if you lose a large customer and the business is not worth the same anymore?  The value could go up or down, there is considerable risk for both parties to lock into a purchase price to be paid over a long period of time however you still need to factor in growth that you bring into the business.  If there is a value for the business, then that gets rid of one problem but if the company goes bankrupt, are you still liable for the original purchase price.  You will have to factor in that risk in your purchase and sale agreement.


Filed under: Buy a business — Gary Landa @ 12:51 pm


1 Comment »


  1. I’ve always wondered about this. Is there any chance that an employee could buy a business from his employer? Your post really helps. Keep up the good work. This will be helpful for people who are interested in making a business of their own.

    Comment by Lans — June 5, 2009 @ 2:34 am


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