This section helps you work through some key questions around employee buyouts to help you understand whether this is an option for you.
An Employee Buyout could seem like a mammoth task. This page lists questions is designed to help you work through the key questions to decide whether buying out is an option for you. We've listed the questions below, but you can also download the Employee Buyouts: 10 questions to ask document to take away with you and use within your group:
Please note: These are not simple questions, and some will require research and commitment to get a comprehensive answer.
1. Who owns the business?
The business might have a single owner or it may be spread across different parties. Some business owners may have transferred a proportion of their ownership stake into a trust for future family generations. It is imperative to identify all of the owners of the business to ensure that there is a general agreement to the concept of selling to the employees.
2. What is being sold?
Typically an Employee Buyout will involve either the purchase of the owner’s shares, or the purchase of the assets of the business. It is important to clarify exactly what is expected to be included as part of the deal. For instance, some businesses will trade from property that is owned by the seller individually rather than the business and this will not be included within the sale.
3. Why does the owner want to sell?
In most cases the exit will be due to retirement, realising investment value, a desire to do different things etc. However, it is important to clarify the reasons behind the exit and ensure that the operation of the business is commercially viable and has a future.
4. What is the attitude of management & employees to the prospect of a buyout?
While the business owner might be a ‘willing seller’, it is obviously important that the management and employees of the business are open to the prospect of an Employee Buyout and becoming a ‘willing buyer’.
5. What does the business do?
Clearly it’s important to understand what the business does, where it gets customers from, its level of sales and profitability and its viability in the future
6. What are the valuation assumptions?
An independent valuation may have been undertaken, or the owner may have a value assumption based on other factors. Most valuations will be based on either earnings multiples, net asset value, or a mixture. Any valuation must be affordable to the business both at the time of the buyout and going forward.
7. What is the method of exit?
It can be difficult to raise sufficient finance to allow the owner to be paid in full on completion. Therefore, is there the option of a phased exit over time?
8. Is external finance required to complete an Employee Buyout?
It is quite possible that the employees alone cannot meet the valuation of the business, and that cash held in the business will not be enough. Therefore there may be a need to consider seeking external finance. Visit the financing your co-operative section for more information. The ability to raise finance will be reliant on a number of factors such as any security in the business, levels of profit and possibly any co-investment by employees.
9. Is there preferred employee ownership structure?
Most owners will have a view of the future ownership structure of the business. However, before any firm decisions are made it is important that thorough consideration has been given to ensure that the ownership model provides the benefits that employees might want from becoming owners.
10. What are the timescales?
Ideally, when would the owner like to complete the Employee Buyout process? Typically a buyout process can take anything between three and nine months to complete. If a phased transfer of ownership is being considered, this transfer might take place over a number of years.