An installment sale is the traditional way of selling a business to key employees. It usually commences with a business valuation that determines how much the company is worth - a process for which Beacon provides a complimentary valuation.

Next, identify the key employee(s) or open the offer to any employee interested in buying. Agree on the repayment period and interest rate then have a promissory note signed by you and your key employees. The employee banks on the company’s future profits to make the installment payments. An installment sale is secured by the company’s stock, assets, and the employee’s personal guarantee.

With an installment sale, there’s a risk the business could land on hard times, and employees fail to make future installments. As an owner, you can mitigate against this risk in several ways.

Transferring excess cash from the company before you sell it. This has to be done carefully to avoid plunging the business into cash flow problems in the future.
Participate in running the company for as long as needed to be certain that cash flow will continue.
Retain the right to buy back the business if certain triggers occur
An acceleration provision that requires the key employees to pay the remaining installments faster if they do not meet predefined financial targets
Make nonqualified deferred compensation payments, lease payments, severance payments or other means of receiving tax-deductible payments directly from the company. In addition to providing liquidity to the owner, these payments lower the business valuation–making it more affordable for employees while minimizing the tax obligation for the seller.

Pros

Rewards employees by ensuring part of the business may be acquired at a reduced price.
Key employees gain operating control.
Minimizes your ongoing risks as a business owner. You exit the business much quicker than through a long-term installment sale.
As the business owner, you receive an immediate cash payout in full.
The business may get additional financing from the equity investor in the future to fuel further growth.
If a suitable equity investor cannot be found, you can choose to maintain an equity position.
Mainshares that helps match employees with investors and lenders. Your employees can access the support they need to secure the necessary funds, ensuring a smooth transition of ownership.

Cons

Employees rely on a promissory note and, thus, future earnings of the business. Poor performance can extend exit timelines and make installments protracted.
You will receive little to no money at closing. This is unlike the large or full cash payouts you’d receive with other deal types.
There is no guarantee the employee will steer the ship as well as you did. If the business stops performing well, future installments are in jeopardy, and the value of the business drops.
If you fail to close the sale to your key employees and instead opt for a third party, you may end up creating disgruntled employees.
Transferring ownership takes longer than other deal types.

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