Your company’s buyer is purchasing your business. That includes physical assets, of course: equipment, inventory, vehicles. They’re also purchasing the accounts and contracts that you own. The final piece of the puzzle that the buyer expects to receive as part of the transition is perhaps your most valuable “asset”: your workforce. Without the skilled labor to produce and deliver the products or service to keep the company running, the company would lose significant value.
In some companies, the business is so dependent on a particular skill set or depth of experience that an employee is designated as a “key employee.” A key employee is essential to the success of the business, and making sure they stay on after the sale is a priority for the buyer. Key employees might be operational, such as engineers, foremen, or sales leaders, or strategic, such as a CEO, CFO, or Marketing Executives.
In our experience, the concerns about losing a key employee due to a sale are often overblown, but there are steps that an owner can take to mitigate the risk. The first is to maintain confidentiality during the due diligence process. We always recommend that owners refrain from announcing the sale until the very last minute, ideally after the deal has closed. That may not be possible when there’s a key employee involved; the buyer may request a meeting to learn more about the employee and determine whether theirs will be a good working partnership.
We still recommend revealing the sale to the key employee as late as possible. Ask the buyer to do all the research required to make a decision before setting up a meeting; it’s possible that the deal is not a good fit and there will be no need to inform the employees. This process has another benefit: you’ll get a chance to see how the buyer conducts himself. You’ll see how responsive and fair he is and how he does business. This knowledge will help you talk to your key employees about the change in ownership and how well they may work together. It is also a good idea to have the key employees sign an NDA to ensure they don’t share this information with other employees until you are ready to make a formal announcement.
In some cases, the seller may elect to pay a retention bonus to the key employees to ensure that they stay on for a period after the sale, providing training and coaching for coworkers and facilitating a smooth transition. The seller usually makes this commitment since it’s designed to reduce risk for the buyer. The retention bonus can be a useful strategy, especially if the terms of the sale (and the profit the owner will realize) become public knowledge. Some employees will be motivated by knowing they’re getting a share of the sale, especially if they feel they’ve played an important role in the company’s success.
But again, in our experience, most employees will stay on in the company and role they’ve been successful in for a number of years. Unless the new owner is very difficult or plans to make unacceptable changes in the business, most employees will want to maintain the status quo. We have heard of situations where a key employee tried to take full advantage of the situation and made unreasonable demands knowing that they were integral to the sale. However, those occasions are rare and if you already have a good working relationship with your team, most people will naturally want to play a positive role in helping you transition to the next chapter of your life.
It’s also possible that this will present exciting opportunities for the key employee. A new, energized owner, an infusion of capital and passion, and the possibility of growth may all make a key employee not only willing to stay on, but eager to.
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