In the case of employees buying out a company, it is common for part of the purchase price to be paid via options 3 or 4 above. When those options are selected, the seller effectively shares sales or profit with their buyer post-closing. If that is the case, the seller needs protection. For example, the seller should:
- retain control over the business during the transition.
- have the right to unwind the deal if certain requirements are not met.
- ensure that you receive the amount of money you are owed.
We recommend the following:
- List (with your advisor) the adverse outcomes that can occur from the employee buyout. For each, design a resolution mechanism that protects your assets.
- List (with your advisor) the possible disputes that can arise between you and your buyer. For each, implement a binding procedure for resolving the dispute fairly and at a low cost, ideally without involving courts or lawyers. We recommend expert determination.
Deep expertise in designing protection mechanisms matters. (We are exceptional at it.) Lawyers will draft the legal language that implements protections in a contract, but only a capable advisor can design protection mechanisms. Proper protection design requires economics and finance expertise in addition to legal expertise. We possess this rarely held combination of skills.
We have developed a 12-page expert determination agreement by working with several attorneys and business owners. If incorporated into any contract, this agreement provides a legally binding answer to any objective or subjective question. It can thereby resolve most predictable disputes. It resolves disputes at low cost, at relatively fast speed, with minimal vulnerability to the answer being overturned by litigation, and with a high level of fairness and justness.
Instead of selling the full business, can I sell my equity to an employee?
You can either sell your entire business or sell equity to an employee and retain some equity for yourself. By retaining equity, you stand to earn more over the long-run than you would by selling your firm entirely. Keeping majority ownership (over 50%) offers more flexibility and control than having minority ownership.