Employee Purchase Option (EPO)
It’s not that common of a situation for a business owner to sell to an employee or employees for three major reasons.
First: Employees typically don’t have the capital to complete the purchase, even if they know the inner workings of the company and could do a good job running the business.
Second: An employee may not think the business is worth as much as the owner because they’re privy to the inner workings and dysfunctional aspects of the business.
Third: It’s generally not a good idea to start approaching your employees and telling them you’re interested in selling. Employees tend to get a little concerned because they see a situation where they may not have a job if you can’t find a buyer, and they tend to start looking for other employment.
However, in those unique situations where one or more of the employees want to buy your business or have expressed an interest in doing so, the owner can often be in the driver’s seat regarding price and terms. In fact, an employee may have an insight into the future value of the business and passion to carry it on. Therefore, the owner may be able to get the price they want, set up a promissory note and have the security and collateral to come back in and take over the business if needed for lack of payments by the employee/buyer.
Where the employee(s) are buying, there will typically be a Note, paid by the profits of the company and the stock of the company securing it. The owner will get regular reports regarding the financials, and if sales or profits start to go south, the owner can take back control of the company to rein things back in. This is a typical provision and fair to the owner to protect the company, which is essentially the asset paying off the Note.
Training and Leadership. Make sure the employee(s) who think they can buy the business can handle it once they have the reins. This proving period could be for showing things like maintaining profit levels and production quotas, maintaining morale with key employees or simply showing leadership skills with good decisions when the owner steps back completely from operations.
Next, appoint the potential employee/buyer an officer of the company. The owner can still participate in the initial process and a management position. Then as the process evolves and the employee or employees show they have what it takes, the process of starting the transfer of ownership of the company can begin as outline in the purchase contract. This is called a “vesting phase” under what is known as a “vesting schedule,” where real equity ownership will transfer to the employee only under certain conditions and over a certain period.
EPO Contract: Owners may choose to begin transferring a majority of the equity ownership interest in the terms of the EPO Contract. The contract needs to be creative, specific, and demanding in the protection of the owner during the transition. It is imperative that the owner and the employee both find an separate attorneys to negotiate the EPO Contract for the owner and employee.
