Over the past few years, more business owners have started the planning process for exiting. Something that has become increasingly common is owners are wanting to offer the business to existing staff. What I have found is there are several difficult things to contemplate when starting down a seemingly simple path of transferring ownership to an employee.

So, I thought it may be useful to share some of my observations with you to help you when considering a similar scenario. Every business needs an Exit Plan. Even if you are some ways off even giving any thought to exiting, you still should have a plan on how to leave your business.


If there is only one other person in the business, then the conversation about potential future ownership is straight forward. However, if there are more than one employee, you need to consider if you want everyone to buy the business equally, or, allow different shareholdings amongst staff, or only offer it to a select group. This is where it can get quite tricky as some staff may get their nose out of joint if they are excluded from the process. I have had one situation where one staff member offered to buy the business, but, as we discovered later, no one else wanted to stay and work for them if they became the owner!!

Staff have no money

Staff are usually interested in some sort of ownership scheme. But the reality is they do not have enough funds to purchase shares or the business outright. So, we then have a situation where the owner looks at ways to assist the employee into the business. This can be a very good way of getting staff into buying the business. The complexities become apparent when we look at the mechanics of how this might happen. Usual thoughts are that the owner will gift/assign shares to staff as part of their remuneration package. In blunt terms, this is shares instead of some or, all of a pay increase over a certain time frame. The next phase is the idea that as the business makes profits, the staff member can pay back what they owe from their portion of any profit share/dividend situation. Caution is needed here. Seems like a good idea, but essentially you are saying “you owe me money, but you can pay it off with money I would have made anyway”!!! Basically, you are giving the business away. 

How to value the business – especially in the future

Another complex issue becomes how to value a business over time. If a staff member says they want to buy the business but can only afford to pay you a certain amount each year, then the value becomes a potential stumbling block.

Think of it like this: Someone came to you 10 years ago and said they want to buy your house. They were not able to pay for it straight away but could pay you over the next 10 years. If you agreed the value of the house 10 years ago and allowed it to be paid off, how would you feel today about the amount you received for it?? Again, you have essentially given it away – or a good portion of it at least.

To counter this, you may agree the formula to value the business, and use it each time a payment is due, or maybe annually re value the shares. This caters for the increase in value of the business over time. But it may be a deterrent as the employee will see the shares getting more expensive each year and becoming unobtainable. This is often where deals hit a brick wall and progress no further. Calculating the value is straight forward – but the formula for value over time needs careful consideration.

How long to spread the deal

No real answer to how long a payment deal should be. The owner wants the money as quickly as possible, and the employee will be comfortable with a longer term. As above with valuation, there are difficulties for both parties. In my experience, shorter the better. However, there maybe good examples for longer term deals. Especially if the owner is planning to exit but has no set date in mind, or at least is some way off. They can begin the transfer of ownership well before the exit date arrives. Assuming you agree the value (see above) and agree the term, then you are well on the way. But, pay attention to what, if anything, changes during the payment/share purchase timeframe – see below.

What rights do the staff have as they acquire shares

You can agree anything here. However, in my view the answer is none!! The expectation of the buyer is often quite the opposite. You should consider what the impacts are of any privileges associated with being a shareholder. This can really upset other staff. It can also cause friction between yourself and the buyer. Consider a scenario where the staff member has bought 20% of the business over the last 5 years. You turn up in a new Ute, purchased by the business. The view may be that they should a) also get a Ute, or b) be consulted before you get a Ute. In addition, they may become quite vocal about what expenses are incurred by the business that may directly impact their dividend.

I have seen this very issue blow up out of nowhere. It was really a case of not covering off all these items when the agreement was initially struck. You need to be clear about the deal – is it an ownership scheme or a payment plan? If it is ownership, then list the clear rights that are acquired over the time of share purchases.

What if the staff then leave

So, you have a detailed plan in place and things are going well. Then the staff buyer says, “I want to leave.” So, what you need is a clear exit plan for the employee as well as yourself. Can they sell their shares to someone/anyone else? In fact, you need to be clear and specific about what rights they have as a shareholder (see above) and what rights they have if they want to cease being a shareholder. Things like having to offer the shares back to you first. How long do you have to pay for them? At what value to you calculate the buy back and so on. Do you just refund them. And, what if you don’t have the money to do so?

Receive a better offer

What would happen if you agreed to sell shares to staff, and the process had been running for some time, but collectively you are still the majority shareholder and someone else comes along and offers to buy the whole lot for a handsome sum of money?

So here you need to have a clear “compulsory” buy back clause if you want to sell the business to someone else in a better position to do so. Sounds mean, but you don’t want to be hamstrung by someone who has a small shareholding but effectively can dictate to you how the business can be managed.


If staff are buying shares, and you are still in the business – what happens when it gets to 50:50 shareholding? Do you want to remain in the business, but no longer have control? Perhaps you are ready to step back and take a back seat. You could look at it as a way to exit gracefully. It can be quite beneficial to step back but still receive income from the business as a shareholder/employee? Consider how you may cope in the background owing half, or less, of the business that you once had total control over? It may be a struggle to witness events that would not have happened if you were running the show?? It is a clever idea to consider that at 50% shareholding, that this is the “trigger” which says the buyer then has to buy the other 50%.

What about helping to fund the employee into the business

Slightly different to the situation mentioned earlier. This option is where you actually lend money to someone to buy the shares. This would be at the current valuation of the business, over an agreed term and with interest. So, you are playing the role of the bank in many respects. It is also a good option and is straightforward enough – until it goes bad. So again, clarity is important at the beginning. Make sure all the options and remedies are in place at the start.

In summary, the conversation needs to cover off the expectations of both parties. Detail is vital – both for how it works towards the desired result and how it works in the event the desired result becomes unlikely i.e. one or more wants to back out of the deal.

I like the approach where you get together to discuss possibilities with staff well before the “need” arises. This gives much more time to put a good deal in place. Remember we are often talking quite some time before an employee has the means to pay for the business.

Put a detailed exit plan together well before you think you need it. Make sure it is explicitly clear what is being bought and sold.

One final thought. The above is a brief list of items for you to consider when having these conversations. One simple remedy is to work closely with employees about how to raise money to buy assets such as your business. This can be a very powerful and beneficial exercise – even if they don’t buy your business. Putting time into your staff often generates a more loyal employee.

If you feel you need to look at getting an ‘Exit Plan’ in place for your business either to sell to an employee or to put on the market when the time comes for you to move on have a chat to a Prime Advisor to make sure you have everything in place to make this transition smooth and stress free.