“Business is easy until people get involved.” Have you ever heard this quote? Employees can take your business to new heights, allowing you to scale, yet they come with complexities around maintaining relationships and fostering culture.
This brings the challenge for exiting business owners. When do you notify your employees?
The truth is that it varies by business owner, employee position, and the relationships in place. While no two notifications will go the same, we have some recommendations to help business owners answer the question of when to tell them.
During the Due Diligence
Once you have a signed LOI or MOU, or right before it’s signed, you need to inform your controller or the employee in charge of finances. They will be the go-to for the financial records and contracts the buyer needs to complete due diligence. While you can try to keep them in the dark, they will be getting a lot of odd requests that might raise eyebrows.
Next comes your leadership team. Many owners prefer to wait until the due diligence process is almost complete and the contract is pending. We recommend informing this team one-on-one so owners can better predict their reactions, address concerns, and talk about goals for the future individually.
The reality is that most employees who have been there for a while know a potential sale is on the horizon. Everyone knows that when an owner turns 65+ they will eventually look to retire. Other times, your management team has seen you slowly check out of the business over time. We’ve even run into occasions where some leadership members are excited about bringing in new blood to the equation due to the general attitude of the owner.
After the Sale Closes
This is typically when we recommended informing the entire team, minus the leadership team who already know. Sometimes the new owner will attend this meeting, whereas other times the seller will want to address the team solo.
The key is to address employees’ initial concerns early. In short, they all are wondering, “What does this mean for me?”
Especially if the new owner is there, this is their opportunity to talk about the vision of the company, reenergize the team around possibilities and calm concerns that things will change too much. If they don’t attend, the seller needs to talk about why they chose this buyer, calm fears about how the transition will be executed, outline next steps, and help the team see the exciting vision the owner has for the company.
Factoring in Personal Preferences
As we mentioned, this process varies by business owner. Some want to be open and upfront about the process early on. Others wait until the transaction is signed and the new owner is set to take over on Monday.
There is no right or wrong answer.
We typically stress clients tell the key employees early on in the due diligence process. First, we recommend this because as former and current business owners, we understand the relationships you’ve built with your team. Secondly, it’s important to address exiting team members early. Oftentimes, owners already know who is on the way out, and who will likely be excited about a new direction for the company.
Addressing Flighty Employees
It’s understood that some employees will leave as the owner exits. The key is to know if any of the key employees plan to walk out after the transaction. That’s because one of the assets we’re factoring into the sale price is the existing team. It’s part of the “goodwill” you’ve built.
Bottom line, we need to know what your senior management team’s plan is, if it includes staying, and how long. If they plan to leave, we need to know this to inform the buyer or create a strategy to minimize the impact.
For example, one time we had the head of a sales department want to leave to start their own company. We instantly saw the company value take a big hit. So rather than taking that head on, we devised a strategy where the owner offered the employee a $100,000 a year bonus to stay on for two years. This gave the new owner security that the company will keep performing, and the employee is well compensated for staying on. The money was put into escrow from the sale. Should the employee leave before the two years is up, the new owner can use the money to hire their replacement.
Other times, it’s building in a replacement or developing processes to lessen the need for the key employee. Our ultimate goal is to make the transition as smooth as possible, all while reducing risk for the new owner.
Developing Your Strategy
Notifying employees is only one aspect of due diligence. The reality is that the entire process is very strategic from the moment you decide to sell. In fact, we’ve broken it down to an in-depth, four phase process.
To chart out a successful transition from your business, we recommend working on building out that strategy one to three years in advance. At Exit Consulting Group, we use that time to drive value to the business, implement new processes, and streamline systems prior to taking a business to market. This increases the sales prices, giving you a better launching pad into retirement or whatever phase of life comes next.