When you decide to sell your business, be aware that your managers and skilled employees—along with lower-ranking workers who contribute to institutional memory—may represent a large portion of the company’s value. But during the due diligence phase of the sale, fears your staff may inevitably have (Will my job be safe? Will I like my new boss? Will my perks be cut?) can be a productivity-sucking distraction or even prompt people to find new jobs. The following, adapted from Beat the Exit Bubble: The Ultimate Guide for Exiting Your Business by Tensie Homan and Dan Meyer, illuminates the dangers of losing highly valued employees and tells how to discourage them from leaving during this uncertain period.
Keeping your team motivated during this exhausting process is critical. But how do you keep people productive if they’re not sure whether their jobs are going to be secure? Here's how.
What Can Happen When Key Employees Leave
When Homan and Meyer worked on a transaction in which the seller’s top salesperson, Susan, left early in the diligence phase, the buyer had planned to retain Susan to solidify critical customer relationships. Now the buyer became concerned about the strength of the customer relationships and whether the projected revenue was attainable without Susan helming the sales department. After failing to renegotiate a price with the seller due to uncertainty surrounding the loss of Susan, the buyer decided not to move forward with the transaction.
A similar situation involved a man named David, an information technology engineer who was instrumental in product development. During diligence, David was offered a job from another company. David hadn’t been told whether he would be offered a job with the new owner of the current company, and he didn’t want to risk unemployment, so he accepted the other company’s offer. The buyer had viewed David as potentially key to the future of the company but was not far along enough in diligence to offer him a position. Now the buyer had to determine whether David’s knowledge could be replaced and at what cost. The estimated time and cost involved with replacing David and training a new employee resulted in a significant reduction in the purchase price.
One way to minimize the risk of losing key employees is to offer retention or “stay” bonuses as they are often called. Stay bonuses provide an incentive for employees to remain with the company for a specified period of time (either up to closing or for a transition period after closing) to assist with diligence and, potentially, stick around. Stay bonuses can be a set dollar amount or a percentage of the employee’s base salary and are generally paid out at the end of the specified period. If you’re planning to provide stay bonuses, discuss this with the buyer to make sure you’re spending your dollars wisely—meaning that you spend on the employees most valuable to you and the buyer.
Surprise: You May Need to Hire!
Diligence is a time-consuming process for you and your team. Although it goes against every business owner’s philosophy to incur the cost of hiring more people at this time, you may need to hire some part-time help as the process unfolds. It’s a cost to you, but it allows your business to continue to grow, your team to stay motivated and can possibly speed up the diligence phase.