Employee buyout, internal purchase of a business

Employee buyout

Those who run the business
can take it over.

One or several key employees know the business, the clients and the suppliers. They rarely have the capital to buy it outright. The purpose of the legal structure is to make possible an acquisition that bank financing alone would not support.

A sale to employees has a rare advantage: due diligence is shorter, because the buyer already knows what they are buying. In exchange, the relationship changes nature overnight, an employee becomes a counterparty, then a shareholder.

That shift is the real risk in the file. It is managed by writing down in advance what happens if the buyout does not complete, if the employee leaves, or if the new co-owners stop agreeing.

A business transaction engages the Business Corporations Act, the Civil Code of Québec for the sale itself, and filings with the Registraire des entreprises du Québec.

What we do

Making the buyout
workable on both sides.

Choosing the buyout vehicle

Direct share purchase, a holding company for the buyers, progressive entry into the capital. The structure depends on how many buyers there are and on their financial capacity.

Progressive entry into the capital

Staged subscription, share options, separate share classes. The employee becomes an owner at a pace the business can absorb.

Seller financing

Vendor take-back, repayment schedule, security in the seller’s favour, ranking against the bank lender. This is often the piece that makes the deal possible.

Shareholder agreement

The decisive document. Required majorities, deadlock resolution, shotgun clause, mandatory buy-back on departure, death or disability.

The employment relationship

Does the buyer remain an employee during the transition? Compensation, status, and how the employment contract fits with shareholder status.

Supporting the seller

How long they stay after closing, their exact role, their compensation, and the point most often overlooked: what they no longer decide.

The path

From plan
to full transfer.

The identification

Who wants to, who can, on what terms

The valuation

Setting a price defensible on both sides

The structure

Buyout vehicle and financing

The framework

Shareholder agreement

The transition

Handover of control and the seller’s exit

Frequently asked questions

What we are asked most.

How does an employee finance the purchase of a business?

Rarely in cash. The usual structure combines a modest down payment, a vendor take-back from the seller, a bank loan and sometimes a progressive buyout funded by the company’s own dividends.

Can several employees buy together?

Yes, and it is common. You then have to decide from the outset who decides what: a shareholder agreement setting out required majorities, exit mechanisms and what happens to the shares of an employee who leaves.

What if the employee buyer resigns before the buyout is complete?

The agreement must provide for it. The usual clauses are a mandatory buy-back of the shares at a price set by a pre-agreed formula, and forfeiture of shares not yet paid for. Without them, you end up a shareholder alongside a former employee.

Does the seller have to stay on after the sale?

Often, for a time. Transferring client relationships and know-how does not happen in a week. That presence is set out in a contract: duration, role, compensation and, above all, what the seller no longer has the power to decide.

Two texts illuminate this kind of file: what your business is really worth, since the price has to be defensible on both sides, and the shareholder agreement, which becomes the key document as soon as several employees buy together.