I run a small manufacturing shop with 14 employees. Two senior staff have approached me about buying the business over the next few years. I want to be fair and I want it to actually work, but I have no idea how to value something like this without bringing in an outside firm that will cost a fortune. Has anyone been through this? What methods did you use and what did you avoid?
Employee Ownership
How to value your business fairly when selling to staff
We sold to a management team three years ago. The biggest lesson: get an independent valuation, even if it feels expensive. The buyers are your employees now, so if the number looks self-serving on either side, it poisons the the whole deal. We used a multiple of adjusted EBITDA and had an accountant we all trusted review it.
How did you structure the payments? That seems like half the problem.
Seller-financed note over five years, with a small down payment. The valuation determined the note principal. We added a clause that if revenue dropped more than 15% in the first year, we'd revisit the schedule. That gave everyone some breathing room without renegotiating the actual price
I would be careful with EBITDA multiples right now. Rates have moved and buyers—even internal ones—are more cautious. Did either of you look at an asset-based approach?
Asset-based is usually lower and doesn't capture goodwill. For a small shop with loyal staff, goodwill is a lot of the value. We did a blend: hard assets at book value plus a negotiated amount for customer relationships and training. It took three meetings to agree on the second number.
That's fair. I was thinking more about what happens if the staff can't raise the cash for goodwill. A seller note reduces that risk, but it also means you're still exposed if the business struggles. Some owners I know kept a minority stake for two years just to smooth the transition.
The minority stake idea is interesting. I hadn't considered staying on in any formal capacity. My worry is that the staff might feel like I'm hovering. Did that create friction for people you know?
Not in the cases I saw, but the owner stayed out of day-to-day decisions and only weighed in on big spending. It was in the agreement. The friction came from unclear roles, not the stake itself.
Also worth checking whether your staff can get any outside financing at all. If a bank won't lend to them, your seller note is doing all the work, and that changes how you value the risk. We found a local credit union that would lend against equipment. It wasn't a huge amount, but it made the note smaller.
One thing nobody mentioned yet: document the valuation methodology in plain language. When the staff eventually sell or bring in a new partner, the original number will be questioned. Having a clear paper trail from day one saves a lot of grief.