Sales of a business come in all different flavors. We’ll spend some time over the next several posts going through some common options for selling a business. Today we’ll look at the “insider” sale, which is not to be confused with the less desirable transaction of “insider trading.”
An insider sale involves transferring ownership to an existing employee or co-owner. Although some insider sales may involve a lump sum cash transaction, often the buyout occurs over time, typically funded in part from ongoing earnings of the business.
Depending on how the insider sale is structured, the seller may gradually transfer his or her ownership during the payout period, or the seller may transfer ownership in one fell swoop but retain a security interest, such as the right to reclaim the ownership stake if the buyer doesn’t perform its obligations (lawyer-speak for “doesn’t pay on time”).
One benefit of an insider sale is a greater likelihood of ongoing success than with an “outsider” sale, because an insider usually has greater familiarity with company operations and personnel. In addition, an insider sale may allay concerns from other employees, as well as the company’s suppliers, customers and lenders, about ongoing leadership and management. This in turn may increase the likelihood of getting a deal done, obtaining a fair price, and the ongoing success of the business, which is critical if the selling owner is getting paid over a period of time.
Downsides may include resentment from other employees who find themselves working for a former co-worker, or the realization that the new owner lacks skills or experience to fill the previous owner’s shoes. Also, new owners may want to invest more profits into developing new product lines or customer bases, which may reduce short-term profits, thus limiting the availability of funds to pay the selling owner. In addition, a sale to an insider may result in a lower price than a sale to an outsider.