WHAT TO DO ABOUT EMPLOYEE OWNERS IN TARGET BUSINESS?

Hi all,

I'm currently looking at an opportunity where 3 employees are also owners in the business totaling just over 20% ownership between the 3 of them. The owner does this with all 5 businesses he owns where he provides equity to key employees. The owner was planning to sell to those employees but has lost patience with that transaction due to some issues with the employees getting things in order to arrange financing. This is related to their personal finances and ability to secure financing and not the business. The deal recently came to me through the broker after the owner made the decision to look at other options. I won't go in to details on the business but I like it and am planning to get an offer together.

The current owner's preference is to keep the employees on board as owners in the business and to sell is ~80%. Because the current owner has 4 other business and some of those larger he mostly relies on these employees to run the business and spends around 10hr / week dedicated to this business. If I go this route, an SBA loan would be off the table to keep the other owners on and I would use a large seller note coupled with as much non-SBA bank financing as I could arrange.

Alternatively I could go the SBA route and buy 100% of the company. The trick here then is how to keep the key employees after they are no longer owners. One issue is the SBA 12 month rule which I think there are ways to get around. The main issue I'm concerned about is how to keep them engaged and wanting to be there once they are no longer owners.

In general I'm not in favor of partners I don't really know but am leaning in this case towards going with Option 1 to ensure continuity of the business as long as I have full control. Not the ideal situation but nothing is perfect and it's a strong business that ticks a lot of boxes for me. Would love any thoughts on things I should be thinking about here.

Cheers!



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