The Future of Your Employees Under New Ownership

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Typical high-level concerns for business owners considering the sale of their business include maintaining confidentiality, understanding and obtaining a realistic company valuation, formulating a favorable deal structure, and choosing the right professionals to represent them in the process. An additional, and more emotional concern for many owners of privately held, entrepreneurial companies is, what will happen to their employees post-closing.

Many small and mid-sized business owners view employees like family. They have shared in the good times as well as the challenging times; and, are a major reason that the business is in a position to be sold for a premium valuation. It is common for owners to express a deep concern for the future of their employees under new ownership.

Wall Street portrays mergers and acquisitions as a way to slash the staff to demonstrate impressive short term profits. This may well happen with large conglomerates when the acquired business has excess costs, wages, and personnel that prevent them from being competitive in the global economy; however, this is not generally the case with family or entrepreneurial companies that typically operate very “lean and mean”. We find that employees are cross-trained to perform multiple job functions and are all vital to the company’s performance.

Buyers of lower mid-market companies are typically savvy business people and appreciate that employees of smaller businesses may have deep rooted customer relationships, understand the nuances and competitive advantages of company products and services, and have already experienced the learning curve associated with the industry and their respective roles. Retention of the infrastructure and successful business culture are critical to post acquisition continuity, thus current qualified staff are highly valued.

Employee retention mitigates acquisition risk and enhances the probability of a “seamless” and successful integration and transition. It is not uncommon for buyers to have key employees enter into employment agreements as a condition to finalizing a transaction. Without this assurance, they might view the acquisition as too risky.

Prior to a closing, during the late stage of a transaction, it is important that both the buyer and seller provide the employees with necessary reassurances. They must be assured that the ownership change will provide enhanced opportunities and future security as a result of the buyer’s expansion goals. In many instances, employees benefit from increased compensation and benefits offered when being acquired by a larger company. Additionally, owners may choose to compensate their key employees through a stay on bonus or lump sum payment recognizing their years of loyal service and ensuring their cooperation with an orderly transition. If this is the case, it should be discussed between the buyer and the seller.

There are always exceptions in terms of post-transaction employee opportunities, especially if the company is being acquirered by a similar business. There may be some administrative and/or financial functions that mirror existing staff roles. In these cases, the redundancies need to be explored to see if there are lateral positions or if the buyer’s staff has already maximized bandwidth. The seller cannot reasonably expect to dictate the buyer’s actions. In these cases, the seller should provide as much advanced notice as possible and implement an appropriate severance package to give the displaced employee a chance to seek a new opportunity.

While characteristics including profitability, predictability of earnings, and future demand are motivating factors of a business sale, non-tangible value drivers such as having an educated and experienced staff in place, are equally as important. Overall, majority of employees are typically viewed as being vital to continued success. Those that interface with customers and suppliers, or possess key knowledge about the company, products, services, industry, technology, etc., should be valued and retain their positions with equal or better terms. It is the job of a business owner and their transaction representative team to convey the value added capabilities of retaining the management team and personnel.