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Businesses Selling to Key Employees

by Oct 30, 2023Magazine, Small Business

Sapunkele | iStock

When businesses are sold, they are typically acquired by competitors or companies seeking to diversify their portfolio. But a growing trend is for small businesses to be purchased by one or more key employees looking to take on a leadership or ownership role.

In Alaska, entrepreneurial employees are realizing their dream of purchasing the companies where they have invested their time, energy, and lives.

While no official numbers are available to quantify how many Alaska businesses have sold to employees, there is clearly more interest in business ownership, including among employees. At least that’s what the Alaska Small Business Development Center (SBDC) is observing.

Since the COVID-19 pandemic, SBDC has seen a marked increase in the number of new clients who want help buying or selling an existing business, according to executive director Jon Bittner. The center has also noticed that a number of the businesses being sold have been going to employees.

Jon Bittner

Alaska Small Business Development Center

The number of new clients who requested SBDC’s help “purchasing an existing business” jumped 44 percent between January and June of 2022 and the same time period this year, Bittner says. “During those six months in 2022, we received fifty requests for assistance regarding purchasing a business, and in 2023 for the same time period, we received seventy-two requests,” he explains. “Advising time that our staff spends with a business client specific to buying or selling a business also jumped across the state but particularly in Juneau and the Kenai Peninsula.”

SBDC spent a total of 208 hours advising clients from January to June in 2022 and 296 advising hours with clients between January and June in 2023.

What’s triggering the increased interest in business ownership and companies being acquired by employees? There are a range of factors. For example, since the COVID-19 pandemic, business owners are re-evaluating their long-term goals, according to Clifford Cochran, director of SBDC’s Kenai Peninsula Center. “In some cases, weathering the pandemic was too much and drove them out,” he says. “In other cases, the business climate changed, and sellers want to go.”

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Businesses have also changed hands because some owners simply retired or relocated. “We’ve been working with a number of Baby Boomers retiring as well as business owners leaving the state,” Cochran says. “Our population is more transient in Alaskan communities than the Lower 48, so there are a lot more folks coming and going.”

Chad Steadman

First National Bank Alaska

Chad Steadman, senior corporate lending director at First National Bank Alaska, has also noticed significant transitions in business ownership after the COVID-19 pandemic. There was a realignment of thinking, with many owners wanting to retire or change careers, he says. Then the owners needed to determine how their business would thrive going forward. Many want their legacy to continue and to support the individuals who have worked so hard to help their company succeed. “I believe business owners sell to employees because they want to take care of folks they have relied on, ensure business succession, and see their legacy grow and thrive after they are gone,” he says.

Business Acquisition Methods

Across the board, Steadman has seen business ownership transitions that involve owners and employees in restaurants, environmental companies, engineering firms, and the tourism and service industries. Most employees are using a combination of cash, equity from employment, owner financing, and bank financing to facilitate their purchase.

Aside from other direct lending methods, the US Small Business Administration (SBA) 7(a) loan program is another potential funding option. The federal program can benefit a direct employee purchase or adapt to accommodate an employee stock ownership plan purchase. “Existing employees’ operational knowledge, market experience, and customer relations are all benefits when considering financing a business acquisition,” Steadman says. “With the SBA’s support, First National can more confidently consider financing when the new owner’s financial position might not be as strong as the prior owner’s. In this case, terms may be ten years and up to twenty-five with real estate, and down payment requirements may also be reduced.”

Down payment and sale price are the biggest barriers to individuals buying their employer’s business, Cochran says. “Employees often do not have the 20 to 35 percent down payment lenders require, which often nixes the sale,” he explains. “There is too much risk in a seller financing agreement, so that is often considered but passed on. Business owners often overvalue their business, so this can often prevent the deal from happening, simply because a bank will not finance an acquisition if the business cannot support the debt service.”

Clifford Cochran

Alaska Small Business Development Center

However, the Alaska State Small Business Credit Initiative (SSBCI) program, which is being managed by SBDC, is a great tool for employees looking to purchase a business. “If the business is priced well and bankable—meaning it can support the debt service on an acquisition loan—and the employee has the down payment, commercial and SBA 7(a) loans are also good options,” Cochran says. “Businesses priced too high and employees lacking the down payment are the top barriers to make this work.”

“One of the major benefits of purchasing a company that you work for is that the entrepreneur doesn’t have to start from scratch… They already have experience in operating the business and possess the industry expertise that may be required for success.”

—Jenna Wright, Vice President, Anchorage Economic Development Corporation

In the Fairbanks area, the sale of companies to employees has generally entailed some form of buy-out, says Jomo Stewart, president and CEO of the Fairbanks Economic Development Corporation. The transactions have primarily involved establishments that are owned by a single person or family or a few partners.

Jomo Stewart

Fairbanks Economic Development Corporation

That was Angie Tallant’s situation when she purchased Somers & Associates Realtors in 2011 after joining the company in 2000 at the age of 20. She explains, “I was the assistant to the broker for those eleven years, and after about three years of working under his mentorship, I knew that one day I wanted to own Somers because I knew that this was what I was going to do as a long-time career. Somers has been an integral part of real estate in Fairbanks since 1991.”

Since then, Tallant has diligently worked to expand the company, now named Somers Sotheby’s International Realty. Within a year after purchasing the company, she had acquired thirteen new agents. In 2014, she opened an office in North Pole and continued to grow the business. “In 2017, I opened a new office in Eagle River so that the same culture and principles that Somers is known for could serve the Southcentral area,” she says.

Angie Tallant

Somers Sotheby’s International Realty

In addition to adding more staff and locations, Tallant has also made a significant effort to enhance her agents’ access to technology. “I wanted to continue the amazing culture of the office while embracing technology and systems that would help us streamline our transactions and better serve our clients,” she explains. “In fact in 2020, I franchised with Sotheby’s international real estate so that I can better provide upcoming technology to my agents.”

Advantages of Selling to Employees

Jenna Wright, President and CEO of the Anchorage Economic Development Corporation, has observed a growing interest in entrepreneurship in Alaska. In some cases, this has been the catalyst for employees assuming ownership. “In recent years, I’ve noticed an increasing trend has emerged in the popularity of entrepreneurship and employees taking the reins of a company they work at by purchasing the business,” she says.

Selling a business to key employees can offer a whole host of advantages for the current owner, other employees involved, and the business in general. “One of the major benefits of purchasing a company that you work for is that the entrepreneur doesn’t have to start from scratch at the inception of a business idea because they already have experience in operating the business and possess the industry expertise that may be required for success,” Wright says.

Jenna Wright

Anchorage Economic Development Corporation

In addition, purchasing a business that the employee is already familiar with may be perceived as a less risky endeavor, with a faster path to stable profitability. “Established businesses typically have existing revenue streams, customer bases, and assets that can lead to quicker profitability and potentially lower financial risk,” Wright says. “On top of that, owners may be more willing and able to offer flexible financing terms that the employee-turned-entrepreneur would not necessarily have access to on their own in the private markets for income or credit reasons or whatever else.”

Selling a company to current employees can also create a more seamless transition than selling to an outside entity. “By selling to key employees who are already familiar with the business operations, culture, and customer base, the new owner will be able to have a smoother transition with a minimized learning curve, reducing the potential disruption to the business’ continuity,” Wright says.

Having employees as the new owner can also preserve the loyalty and motivation of other employees. “It’s nerve-wracking for employees to go through any leadership change, especially an ownership change,” Wright says. “If they already have existing rapport with the new owner, it can drastically reduce that trepidation and reduce interruptions to operations—or worse, turnover of key staff members.”

Moreover, the knowledge and relationship retention that comes with turning an employee into an owner can have widespread ramifications, Wright says. It can prevent the loss of critical business insight and provide a continuity of relationships between customers and vendors that are so vital to business success and sometimes take years to build.

Cochran has similar thoughts. When employees purchase their company, it often keeps the business momentum and provides for a smooth transition, he says. Eliminating the learning curve with an outside buyer often ensures the quality of the product or service remains. And with the company going to a key employee, this helps retain other employees as well.

Ultimately, the feasibility of the sale is the deciding factor. “If the deal does not pencil out or the employee does not have capital for the down payment, it often goes to a financial decision, with the seller needing to get out of the business while they have strong financials and are able and willing to keep performing at a high level,” Cochran says.

Good for the Community

As a broader benefit, Wright believes that employees purchasing local businesses has a positive impact on the community.
“When local employees purchase a business, they are more likely to prioritize the retention of existing jobs and the creation of new ones and have a sense of loyalty to their local community,” she says. “This helps maintain the employment opportunities that the business provides within the community and the pride the community has in the particular business because residents know that local businesses often form the backbone of a community’s economy.”

Similarly, Steadman emphasizes the positive effect of maintaining a business’ culture and legacy.

“A sale to existing employees is the most seamless transition for customers and vendors,” Steadman explains. “Employee purchases can help businesses leverage their existing local relationships with suppliers and retailers while maintaining continuity and business culture. Whenever an Outside firm purchases a business, profits are redistributed outside of Alaska, and the philanthropy and investment of a local business is lost. It has a significant impact on our community when we lose local companies.”

The internal elevations generated when employees purchase a business also produces important macroeconomic, community benefits, Stewart says. “Part of keeping talent either in a company or in a community is having identifiable, accessible, and functioning ‘avenues for advancement,’ preferably operating under a timeline that offers an employee a fair expectation that the rewards for their work will keep pace with the growth of their own needs,” he says. “Certainly, the real or even perceived absence of these can be a driver of flight from companies and communities alike.”

However, employees of longer tenure and experience will understand the unique needs of the business and will, presumably, provide better service to community members, Stewart says. This also will increase the likelihood the business will successfully remain in operation under the new owner.

From Wright’s perspective, employees purchasing a business presents an exciting opportunity for individual employees and the broader community. It’s also a testament to the evolving nature of entrepreneurship and the importance of cultivating a supportive ecosystem for business ownership. “As Baby Boomer business owners begin to look to retire, I really encourage them to consider mentoring and collaborating with their employees to prepare them for a potential transition that keeps their legacy alive,” she says, “and hopefully contributes to the growth of our young adult population so that our economy can grow for decades to come.”

“A sale to existing employees is the most seamless transition for customers and vendors… Employee purchases can help businesses leverage their existing local relationships with suppliers and retailers while maintaining continuity and business culture.”

—Chad Steadman, Senior Vice President & Senior Corporate Lending Director, First National Bank Alaska

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