Is it practical for owners to use sales of stock to employees for business transition?

While it is common for owners of closely held businesses to sell their businesses directly to employees, there are some significant challenges. First, the cost per employee, especially if the offering is limited to a handful of employees, can be prohibitive even for relatively highly compensated employees. Second, employees may not have the risk tolerance to purchase the shares. Third, the share purchase is done with after tax dollars. The challenges can be even greater if the idea is to sell the company to employees more broadly. Most employees will have neither the discretionary income nor the risk tolerance to make these purchases.

Companies that do want to follow this approach can make it more practical by doing it gradually. For instance, sellers might liquidate their shares over a period of 10 to 15 years. They might make it easier for employees to purchase the shares by providing company provided low interest loans or adding matching shares when employees do make purchases.

Companies also must be attuned to how these shares purchased by employees will become liquid over time. Will the company buy them back or will employees have to try to find other buyers?

For more information, see Direct Employee Ownership.

Link to this FAQ Topic: Direct Employee Ownership