Selling to your employees is not the gentle option. It is the most demanding one

Selling your company to its employees is not the soft landing founders picture. Of all the succession routes, it is the one that needs the most structure, because it has no buyer in the ordinary sense of the word. It has a group, and a group does not decide, finance or lead on its own.

The idea is attractive, and I understand why. An owner who has built the business with the same people for fifteen or twenty years would rather hand them the keys than watch the firm disappear under a competitor's name or into a fund's portfolio. He knows their names and their loyalty. He tells himself the knowledge is already in the building and the customers will not notice the change. All of that is true. None of it makes a transaction.

What makes a transaction is a price and a way of paying it. In the mandates I run, the conversation about collective ownership stalls at the same point almost every time: the employees do not have the money, and the founder does not want to say so. Six or eight managers and staff each putting in fifty to a hundred thousand francs or euros of equity, some of it drawn from their retirement savings, rarely cover more than a quarter of a business worth a few million. The rest comes from a bank lending to the acquisition company they set up, and from the seller himself, through a subordinated vendor loan repaid over five to seven years out of the company's dividends. In other words, the founder who "gives the firm to the team" remains its main creditor for half a decade, and his price depends on that team producing, every year, a level of profit he may never have needed to produce himself.

That is the first requirement, and it is financial. The second is legal, and it is neglected more often. Eight people who own a company together are eight people who can divorce, fall ill, be dismissed, change their minds or die. Without a shareholders' agreement, each of those events turns a slice of the company into a dispute. The agreement has to say who may sell to whom, at what price and when; what happens to the shares of a partner who leaves, willingly or not; how a newcomer is admitted and how a departing partner is bought out without bringing the company to its knees. A weak agreement is cheaper to sign than a good one and far more expensive to unwind.

The third requirement is the one founders see least, because it contradicts the very intention behind the project. A group that takes over needs a head. Equal shares are a generous idea; equal roles are a dead end. In the collective projects I have watched run into the sand, one thing recurs: nobody was willing to tell colleagues who had just become partners that he would be their managing director. Decisions are then taken by consensus, which means slowly, then not at all, and the founder, called back from retirement to settle arguments, becomes the boss again without the title or the shares. A management buyout has the same flaw, but concentrates it on two or three people. Broad employee ownership spreads it across ten, which does not help.

The objection will come that employee-owned companies exist and thrive, in Switzerland as elsewhere. That is correct. They share three things the founder put in place before leaving: a named management with a written mandate and a salary separate from any dividend; a holding vehicle that keeps collective ownership apart from day-to-day operations; and entry and exit rules that make equity something you earn by working and give back when you go. The cooperative settles the question of ownership, not the question of power. Someone still leads, and everyone knows who.

The other objection is that all of this applies to any succession. It does not. A third-party buyer brings his own financing, governance and chief executive; the company only has to be saleable. A child brings at least one person. A group of employees brings its knowledge of the business, which is valuable, and its goodwill, which cannot be pledged. Everything else, the money, the rules, the leader, has to be built, and it falls to the seller to build it or have it built, because the buyers cannot. They are his staff. They depend on him, and they are not going to impose on him an organisation he never asked for.

This is where the owner's role turns inside out. In an ordinary sale he waits for offers. In a collective takeover he is the one who makes the offer possible, which means he has to stop being, at the same time, the seller, the lender, the referee between his managers and the project manager of his own exit. Those roles are incompatible. Loaded onto one person, they produce projects that run for three years and fade out without anyone ever saying no. Growing one successor from inside takes years; growing eight of them, and turning them from employees into partners, takes as long and needs more method.

I do not advise against this route. I advise against choosing it because it seems to avoid a sale. Done properly, it is a sale, with a price, financing, warranties, a timetable, and buyers who one morning stop being colleagues and become shareholders bound by a contract. The founder who accepts that hands over something real. The founder who prefers to see it as a gesture towards the team mostly hands over a problem, and usually finds out the day one of the eight wants to leave.