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Considering Selling your Business? Don’t forget about your Key Employees.

By June 19, 2020No Comments

By; Gary Rayberg, President ROI Corporation.

When faced with uncertainty, the human brain is conditioned to run through a gambit of worst-case scenarios. This is especially true when it comes to the case of announcing your intention to sell your business to your employees and staff. How do you do it without losing key employees and affecting not only the value of your company but your sale as well?

Gary Rayberg, president of ROI Corporation has seen several deals stall out or get delayed due to unclear terms and paths of actions. He has been involved in the sale of businesses and real estate  in 39 states, through two recessions and focusses in Massachusetts, New Hampshire and Rhode Island. He has seen countless transactions, acquisitions and mergers. Let’s break down two of the ways to handle telling key employees… 

One way to handle this is not to say anything to your key employees.  Confidentiality is king!  Sellers will do this because they are concerned, and sometimes rightly so, that the key employees will panic and leave.  The upside to saying nothing is that you do not create worry among the key employees. The downside is that, in the end , the buyer will identify the key employees and most likely make the purchase contingent on employee contracts with the key folks.   We set that meeting between buyer and key employee (s) up just before closing. We want everything else to be settled so that the only barrier to closing is a contract with the key employee (s). That way once the employee agrees, the closing can happen immediately.  I have many client stories on this but can best relay my own story. I sold an employee relocation service provider that I owned to an international buyer in 2005.  All the due diligence was complete except for an employment agreement with my General Manager.  Her name was Lillian and she was the best employee and manager I could ask for. I waited a week while Lillian and the buyer negotiated a deal. One of the toughest weeks in my business life. Would she agree?  Would she quit and cause the sale to not go through? Would she ask for so much money that the buyer would back out? Luckily none of those things happened to me, but they can happen. About 75% of sellers follow this “wait to the end” route with key employees. Rest assured it will eventually be an issue in most cases before closing a sale.

The second way to approach this issue is to have an open and frank conversation at the beginning of the sales process with your key employee(s).   Ask them to sign a non disclosure agreement and then explain your intention behind the sale and reassure their best interests are a priority, however, leave out details such as sale price and key terms. And then… Incentivize. Most key employees leave due to worries about their financial future under the new owner. Since you will most likely need their cooperation during the sale to fill in the new owner on the day to day operations, many sellers will build in a stay bonus program. Usually these bonuses are timed to pay out after 6 months to year of employment under the new owner. I have even see plans that pay at 6 months, one year and again at two years.  If termination happens before the time has passed another amount can be agreed upon. The plan can be tailored to the situation.  This accomplishes two things. First the employee can become part of the sales team. Making sure their responsibilities are adding to the bottom line to make the business (and them) more saleable to a buyer. This Key Employee also has a stronger feeling of job security. If they are being paid to stay, they must not be losing their job.

To decide which is the right transition plan for your key employees, first identify who the key employees are likely to be in the eyes of a buyer . A business broker can review your company and help you understand who a buyer will most likely have on the “must have” list.   Usually 1 to 3 folks depending on the size of your organization.  Next take stock of the key employees personality?  Can they handle knowing upfront or will they freak out and quit?  You will have to make that decision based on the time you have worked together. There is no 100% always right answer. Just be aware that one way or the other , you will most likely need to deal with the key employee issue before closing the sale.

Have questions about selling a business or transferring ownership to a key employee or family member? We can help! Contact Gary Rayberg at grayberg@roibusinessbrokers.com  or at 781 -682-6209. Ext 208.

About ROI Corporation

ROI Corporation, based in the Boston market, has been involved in the sale of businesses and real estate in over 30 states since 1997. They also assist in the transfer of business ownership between generations and to key employees and management teams. ROI serves all of New England including MA, NH, RI, ME and CT with two divisions; a main street division serving smaller businesses as well as their middle market M&A division. Their Marietta, Georgia office, specializing in Service Distribution & Manufacturing Companies, serves the southeast United States. For more information, please visit us on the web at www.roimergers.com or call (781) 682-6209.