Stepping Back: Selling My Company to Employees

I founded Custom Design & Construction in 1988, and today we have about $3.8 million in annual revenue and seven team members. In 2018, I started considering stepping back and saw three options: One would be to just close the doors, but that didn’t feel right. For one thing, we have great team members, and then there are the clients who trusted us with their homes. We provide a strong warranty, and I wanted to be able to honor it. Another idea was to sell the company on the open market, and the third was an internal sale.

I had a couple of longtime, dedicated employees who I thought would make great owners. They have very complementary roles: one heads up sales and the other is the production manager. I reached out to them, and over time, they both said yes.

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Structuring the Deal

The first step was figuring out a current value for the company so that we could determine the sale price. We worked with industry advisor Mark Richardson, along with a CPA, and settled on a number. Next is the deal itself, which happens in two steps.

Step one is the partners incrementally purchased 49% of the company stock. That’s the process we’re in right now. Once that’s completed, they will buy the remaining stock. Each paid an initial deposit,  which put some skin in the game for both of them. Then it’s a buyout using their share of the profits—basically, I’m loaning them the money, and there’s a rate of return on the interest that’s being charged for that, plus the profits. We’re on track for them to own the 49% in January 2024.

One important aspect of this purchase is having a buy back agreement in place. This way, if they decided not to continue, or if I decided that it wasn’t a good fit, both of us had a level of protection. But I do figure that if they can purchase the first half, then they are more than capable of running the company.

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Minimum and Maximum Value

Another thing we did in order to protect everyone involved is establishing a minimum and maximum value for the company on the day that the 49% is purchased and the process for buying the 51% begins. There’s a good reason for putting numbers in place on both sides. The minimum figure protects my interests to some extent.

As for the maximum side, their viewpoint was, “What’s the advantage of trying to build a company and increase its value when that only causes me to have to pay more?” So we agreed on a range for the future value of the company, regardless of what the true valuation will be on the day they pay the first half. It puts all parties at a little bit of risk and gives all parties potential upside.

A New Role

As part of this transition,  I have shifted from being in the trenches to more of an advisory role. I’m helping them problem solve and create business plans and projections.

Last year was the first year that was actual business ownership training. They wanted to look over my shoulder and see what I did on a daily basis. They asked intelligent questions and delved deep into the “whys” behind the answers. Now, in 2022, they’re driving the bus. I only help with some strategic stuff.

A Big Win

The arrangement has been a win for all three of us. On January 1, 2021, when they officially became owners of 49% of the company, we made a big announcement to everybody. It has been great. I’ve also seen a shift in their perspective.

They’ve always acted in the company’s best interest, but once this journey began I noticed a new attention to resources. All of a sudden, it became, “Do we really need to add another computer? Can we get by with the printer that we have? Do we absolutely have to add that expense?”