“Don’t confuse ‘strict confidentiality’ with ‘keeping employees in the dark.’ Private is useful. Secretive is deceptive.” Stacy Feiner – from her book Talent Mindset.
The quote by Stacy Feiner is appropriate for working with employees in the day-to-day operations of a business, but what about when the owner of a business is ready to realize their exit strategy? Business owners are generally passionate about what they have created and nurtured, but there comes a time when the business owner needs to take their chips off the table. When is the “right” time to tell employees that the business has been sold?
The Buyer Needs the Workforce
When a buyer acquires the assets or stock of a business, they expect that the business will perform as well as or better than the business performed prior to the transaction. There is buyer expectation that the customers will continue to purchase from the business after the transaction, the physical assets of the business will continue to operate after the transaction, and the employees will continue to be employees of the post-transaction entity. Probable retention of the in-place workforce is critical to the expectations of a buyer and important in the valuation of the business sale price. If made aware of a potential sale, the employees of a business that is being sold will most likely experience fear of the unknown and have concern for their future job prospects with the company. Neither the seller nor the buyer of a business wants employees to start a new job search because of fear and trepidation from the potential sale. Business owners appreciate the challenges of hiring and retaining good employees every day.
Selling a Business is a Full-Time Job
When a business owner decides to sell their business, they need to be prepared for an exponential increase in the amount of their time spent on work. The complexity and degree of information that will need to be provided to a potential buyer during the due diligence process will be significant. The buyer will request financial data, information on customers and suppliers, employee benefit plan data, intellectual property owned or utilized by the company, and information on the legal affairs of the company. It may not be possible for a business owner to collect and provide all of this information on their own.
Confiding in Key Employees or Managers
In selling a business, the owner may find it useful, and necessary, to inform key leadership or management employees of the owner’s intentions. Confiding in trusted employees will reduce the burden of due diligence production on the owner and can provide a “different perspective” of opinions in negotiating the sale.
In the event an owner decides to bring some key employees into the fold, owners may choose to reward those key employees with an incentive in the form of a bonus payment if those key employees assist in the sale process. Conditions that the employee must meet in order to receive the bonus could include: (i) maintaining the confidential nature of the potential sale; (ii) assist in gathering information for due diligence; and (iii) stay as an employee of the company through the closing date.
Communicating to the General Workforce
Most business advisors suggest that the general workforce of a company should not be informed of the sale of the business until after the transaction is completed. A sale is not complete until the transaction closes and the wire transfers have been transmitted. If the transaction falls through for some reason, an owner can minimize the anxiety of their workforce by not informing them of a transaction that did not happen. Informing the general workforce after the transaction closes will also give the new owners an opportunity to introduce themselves to the employees prior to those employees potentially embarking on a career search prior to the closing of the transaction.
Selling a business is an emotional and potentially stressful time for the owner. Employees of a company that is being sold will experience those same feelings of emotion and stress. Having a thoughtful and practical process for informing employees of the sale of a business can lead to a more efficient, rational and financially rewarding transaction.
This information should not be considered a comprehensive discussion of employee communications, legal advice, or all that parties should consider in selling a business. Should you wish to discuss selling or purchasing a business and its implications, contact an attorney who can provide guidance tailored to your specific situation.