Should I tell my employees about the plans to sell my business?
There are no hard-and-fast rules regarding when you should tell your employees about your plans to sell your business.
- If your company’s culture is positive and you have trust with your employees, you may consider telling some of them about the sale.
- If you have a larger-sized business and have an in-house controller or CFO, you will benefit from informing your controller or CFO because they will be playing 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 will quickly become suspicious. 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 the planned sale confidential.
If your staff is large, we recommend keeping the sale a secret. 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.
The Advantage to Telling Your Employees
If you do decide to tell your employees, you can use this to your advantage. You can mention to buyers that you have told your employees, and you can selectively let buyers meet with some of your top people. This helps the buyer feel more comfortable and lowers risk. The lower the risk, the higher the purchase price that can be justified. This also helps your employees feel more comfortable since they have the opportunity to meet with prospective buyers before one is selected.
This article 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.
Table of Contents
- When Should I Tell My Employees?
- How Should I Tell My Employees?
- Use a Tiered Approach
- Plan The Employee Meeting
- Keep Things Positive
- Ask Employees to Sign a Confidentiality Agreement
- Be Prepared for the Unexpected
- Be Prepared for the Question
- Have a Backup Plan In Case Things Go Wrong
- Retain Your Employees With a Retention Bonus
- Who Else Should I Tell About the Sale?
- Professional Advisors
- How to Handle Buyers Who Want to Talk to Employees
When Should I Tell My Employees I am Selling my Business?
Tell your employees as early as possible or as late as possible. Why?
- 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 plenty of time to replace them.
- 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 ten 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 in any event. Buyers are just as nervous about losing employees as employees are about losing their jobs.
How Should I Tell My Employees I am Selling my Business?
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 your retention bonus agreement and a non-solicitation agreement. The non-solicitation agreement prevents your employees from actively recruiting your 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.
Be Prepared for the Unexpected
Be Prepared for the Question
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:
- 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, we recommend asking your spouse 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.
- Confess. Your second option is to spill the beans. Again, there are no hard and fast rules. If you are unsure, use the first option and play it off, and you can always come back and confess later on.
Have a Backup Plan In Case Things Go Wrong
We have had transactions that have 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 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. Telling employees as late as possible minimizes the amount of time in which damage can occur.
Retain Your Employees With a Retention Bonus
Retention Bonuses for Key Staff
If you decide to tell your employees, we 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 & Timing
You can also consider releasing the bonus in stages for six 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
We recommend positioning the bonus as you share your 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 that you will share a piece of the pie with them because the company wouldn’t be in a position to be sold without their loyalty and hard work.
Who Else Should I Tell I am Selling my Business?
Who should you tell about the sale? Let’s cover some key stakeholders:
Telling your professional advisors is almost always a safe bet, assuming they are professionals. They are used to their clients selling their businesses and are unlikely to be surprised. Additionally, professional advisors, such as accountants and attorneys, do not like surprises, and getting them involved early in the process may prove to be of great benefit.
Landlords are also accustomed to businesses being bought and sold, and the news will not shock them. Your landlord may also potentially have a buyer. Informing your landlord early on normally carries the benefit of being able to pre-negotiate the terms of the transfer.
Franchisors are also accustomed to the transfer of franchises within their systems. Again, the sooner you tell them, the better, and there is little risk here. In fact, franchisors may become distrustful if you do not inform them early in the process. Many franchisors also provide assistance during the sales process and may help in generating buyers for your business.
We recommend informing those closest to you, especially if you live in the same house. Keeping the sale a secret from your nearest family members will be nearly impossible. If your family members work in the business, this should be handled with caution.
We recommend telling only your closest friends about your plans, as most will have a difficult time keeping their lips sealed. If you trust and share a close bond with a friend or two, this friend can be a safe person to talk to during the process, providing emotional stability for you during the transition.
We recommend knocking over the easy dominoes first. In other words, pick out one or two key employees who you believe will be comfortable with your plans. Then, tell the remainder of your employees. In our experience, about 20%-30% of business owners inform their key employees.
We do not recommend informing your suppliers unless you believe they would be a valuable source of potential buyers. Telling your suppliers is highly risky because they also likely do business with your competition and are likely to spread the word.
How to Handle Buyers Who Want to Talk to Employees
Unfortunately, buyers sometimes want to talk to an employee during due diligence. It happens. We recommend standing your ground. This involves having a poker face and resolution. Most buyers will give in, move on to other issues, and forget about it. Some buyers, however, absolutely insist. If the buyer insists on talking to a few select employees about the sale, do so only after all other due diligence matters and other contingencies have been resolved, such as financing, transfer of lease, etc. In other words, the sale should be ready to close, and this should be the only remaining step.
Summary: Informing & Retaining Employees When Selling a Business
As you can see, 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 and consider your relationship with your employees and personal advisors. Obviously, word will get out 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.