“I’ve never been a guy who’s just about getting a check, so I thought: is there a way we can keep this going, and bring others along for the ride?” (Dan Kenary, founder Harpoon Brewery, on introducing an employee ownership arrangement)
When entrepreneurs imagine an exit, they usually picture three doors: a trade sale, a private-equity deal, or a family handover. Yet there is a fourth route that is often less discussed and, for the right company, more emotionally and strategically satisfying: selling the business to the people who already know it best. When properly structured, employee ownership is a succession strategy that can deliver liquidity to the founders, stability to the staff and continuity to the customers.
Beyond the obvious buyer
For many owners, employee sales may work because they offer benefits more traditional sales do not. External bidders may promise a premium, but they can also bring integration risks, redundancies, culture changes and potentially even the wholesale dismantling of what made the company valuable in the first place. Selling to your employees, on the other hand, may offer a route towards preserving the enterprise, rewarding the workforce and allowing you to retire without feeling like you’ve sold the soul of the business.
Is it even possible?
In a conventional business sale, accountants are commonly responsible for preparing financial statements, supporting due diligence and calculating the tax implications of the transaction. An employee ownership transaction requires a much broader advisory role.
The first question your accountant (that’s us) must help you answer is the vital question of what the company is worth, and just how employees might be able to purchase it. Valuation may draw on normalising earnings, cash flow forecasts, comparable market multiples, the asset base and the particular risks of the business and ensuring accurate financial reporting. This will give you a clearer understanding of what the business is worth and whether the proposed transaction is financially sustainable.
Where employees do not have the capital to purchase a business outright, it becomes important to evaluate the options available to finance the purchase as this will impact the viability of the transaction.
How to make it happen
Once you’ve established that selling to your employees is possible, you need to decide which route to take. In South Africa, there are many different ways of doing it. Employees may acquire shares directly, either individually or through an acquisition vehicle. Some employee ownership arrangements may be structured to hold shares collectively on behalf of employees, often through a trust or another ownership vehicle. B-BBEE objectives can also be incorporated into an employee ownership arrangement.
There are many different ways to skin this cat. Each option carries different tax, governance and funding implications that change based on your company’s unique situation. Taking into account your wishes, and the financial landscape of the business, your accountant can determine exactly which of these methods is most viable.
Other considerations
Another thing which may impact the decision-making process is how taxation could be applied. Depending on how the deal is structured, founders may become liable for Capital Gains Tax on the disposal of their shares, while employees could face income tax implications if shares are acquired below market value or through certain incentive arrangements.
Trusts, debt-funded acquisitions and phased ownership transfers can all influence the overall tax outcome, making early advice essential. As your accountants, we can model different scenarios, identify potential tax efficiencies and ensure the transaction complies with the requirements of the Income Tax Act while avoiding costly surprises for both buyer and seller.
The bottom line
Selling to employees is rarely the quickest or simplest exit. It demands careful structuring, realistic valuations, appropriate funding arrangements and ongoing governance. But for founders who value continuity as much as financial return, it can provide one of the most meaningful succession strategies out there.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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