Informing and Retaining Employees

There are no hard-and-fast rules regarding when you should tell your employees about your plans to sell your business. They will obviously find out about the sale eventually, but when they find out, and how, can play a part in how smoothly the transaction goes.

Deciding if You Should Tell Your Employees

• Positive Culture: If your company’s culture is positive, and you have trust with your employees, you may consider telling a select group of them about the sale in advance. 
• Company Size: If you have a larger business, you will benefit from informing your controller or CFO because they will play a pivotal role in the sale process. It would be almost impossible to keep the sale a secret from your in-house controller or CFO during your preparations and due diligence. The process of selling your business will involve numerous financial requests, and your controller would quickly become suspicious as a result. You may want to talk to them directly and disclose the sale only to them. If so, we recommend asking them to sign a non-disclosure agreement (NDA) to ensure they keep your plans confidential.
• Large Staff: If your staff is large, I recommend disclosing the sale on closing day. It’s nearly impossible for a large group of people to keep mum. While your staff may feel betrayed, you can simply explain to them that it would have been impossible for everyone to keep the sale a secret, so you had no choice but to keep it under wraps until the sale became official. And while you’re at it, this would be an excellent time to announce a bonus for all employees, if you choose to do so.

Tell your employees as early as possible or as late as possible.

The Advantage of Telling Your Employees

If you decide to tell your employees before the sale, you can use this to your advantage. You can mention to buyers that you have told your employees, and selectively let buyers meet with some of your top people. This helps the buyer feel more comfortable and lowers the perception of risk for the buyer. Because there is a relationship between risk and return – the lower the risk, the higher the return – or purchase price – that can be justified. Telling your employees in advance also helps them feel more comfortable since they have the opportunity to meet with prospective buyers before one is selected.

This section walks you through the process of deciding when to tell your employees – specifically how you should tell them, tips for retaining your employees, and who else you should consider telling in advance of the sale. 

Deciding When To Tell Your Employees

Tell your employees as early as possible or as late as possible. Why? 

• Early: If you tell your employees early, you have plenty of opportunities to repair any damage that occurs as a result of your conversation with them. Some employees may jump ship. If this happens, you will have time to replace them. 
• Late: By telling them as late as possible, the amount of damage that can occur between your conversation and the closing is minimal. In most cases, telling your employees as late as possible involves telling them the day of closing.

Deciding when to tell your employees also depends on the circumstances and the culture of your company. If you have 10 to 50 employees and your culture is trusting, you may consider telling them in advance. The longer the employees know, the more opportunity you will have to build trust and prepare them for the process. You should stress that you will only sell to a buyer who will retain them. Frankly, this shouldn’t be a problem since nearly every buyer will want to retain your current staff, unless they plan on relocating the business. Buyers are just as nervous about losing employees as employees are about losing their jobs.

Deciding How To Tell Your Employees

Use a Tiered Approach

If you decide to tell your employees, we recommend informing your top people initially, either individually or as a group. Once they are on board, you can meet as a team, and the other employees will look to see how the top people react. If your top people react favorably, the rest of the team will likely follow suit.

Ask Employees To Sign a Confidentiality Agreement

Consider asking your employees to sign a confidentiality agreement. This agreement can be paired with a retention bonus agreement and a non-solicitation agreement. The non-solicitation agreement prevents your employees from actively recruiting other employees or customers in the event they choose to start a competing company or work for a competitor. Ensure this agreement is assignable to the buyer.

Plan the Employee Meeting

Most employees will be terrified of losing their jobs or experiencing major changes in the business. It may be helpful to have the new owner at the meeting to reinforce that they would like to retain everyone and not make any major changes to the business. An intelligent buyer will not rock the boat until they have established a strong relationship with your team. Once this relationship has been established, they will also help ensure buy-in to any changes.

Keep Things Positive

Position your plans as a positive move for your employees. For example, a new buyer may invest heavily in the company, increase salaries, and make other improvements to the business. If you position the transition correctly, employees will view this as an opportunity rather than a threat.

Your employees’ primary fears are the loss of their jobs or major changes to their roles. If you can assure them that neither will happen and that they may benefit from the transition, your employees will be comforted and can assist more readily with the transition. Informing your employees also makes buyers feel enormously comfortable with your business.

Retain Your Employees With a Retention Bonus

Retention Bonuses for Key Staff

If you decide to tell your employees, I suggest offering your key staffers a bonus for staying through the transition. The bonus should be substantial enough to motivate them to stay for a significant period of time following the transition, especially if you are financing a portion of the sale.

Amount and Timing

You can also consider releasing the bonus in stages for 6 to 12 months following the closing. A typical bonus is 5% to 10% of their annual salary. You shouldn’t give the employees so much money that they can band together and start a competing business, but it should be enough to motivate them to stick around after the closing. Releasing this bonus in stages helps solve this problem.

Explaining the Purpose of the Bonus

I recommend positioning the bonus as being your way of sharing your business’s success with your people. If you position it as a “retention bonus,” your employees may realize the leverage they have over you and may use that leverage to their advantage. Instead, you want to let your employees know you will share a piece of the pie with them because the company wouldn’t be in a position to sell without their loyalty and hard work.

Be Prepared for the Unexpected

You must be prepared in case one of your employees approaches you off-guard and asks, “I heard you are selling the business. Is that true?” If this happens, you have two options:

1. Play it Off: “Yes, haha, of course. My kids are for sale, too. Everything is for sale for the right price. Did you bring your checkbook?” In other words, you need a pre-planned story. If you choose this route, I recommend asking your spouse, a friend, or family member to catch you off-guard and ask you several times randomly during the day as to whether your business is for sale. This way, you can practice and hone your response before it’s show time.
2. Confess: Your second option is to spill the beans. Again, there are no hard and fast rules. If you’re unsure, use the first option and play it off – you can always come back and confess later on.

Have a Backup Plan in Case Things Go Wrong

I have had transactions that hit hurdles when an employee left in the middle of due diligence because they found out about the sale and felt betrayed by the seller. This is uncommon, but you should be prepared in case this does happen. Have a contingency plan in place to mitigate possible damage and keep the deal on course. Telling employees as early as possible gives you time to repair any damage before a deal is underway. Alternatively, telling employees as late as possible minimizes the amount of time in which damage can occur.

Key Points

• One of the most delicate decisions during a business sale is the timing of when to tell your employees. You need to determine the best way to approach this for your situation before you begin the process of selling your business. 
• Obviously, word will leak eventually, but if you maintain control of the timing and the process, you can use this critical stage to your advantage. 
• Be prepared for the unexpected, consult with your advisors, and make plans to help the sale become a smooth and successful transition for everyone involved.