Archive for June, 2013

Combining Cultures: Business Sale Success Depends on People

June 17, 2013

new managementThe sale of a business always has implications for the seller and employees of the company being sold.  In some cases, employees will lose their jobs, while in others, they will have a new boss, new policies and procedures to follow, and new expectations.  An owner may have to make the transition from entrepreneur to employee.  The ease or difficulty of making the transition to new roles and reality, depends on the seller’s preparation for the hand-off to the new owner and the new team’s integration strategy.

How Will the Seller Fit In After the Sale?

A seller’s knowledge of his business is often critical to the continued success of the company, and for that reason, the seller’s role after the sale is a significant negotiating factor.  Sellers are kept on to help the new owners reach their goals, but typically without the control they are accustomed to.  It can be frustrating when new management ignores advice or overrules a decision.  Making the mental switch to being employee on a team can be very challenging for an entrepreneur who has had deep involvement with the management of operations, staff and customers.   The best way to overcome the pitfalls of this situation is to negotiate well and be prepared to play by someone else’s rules.   Compensation, vacation time, how long the seller is required to stay on,  revenue goals and decision-making authority should all be addressed in the contract.  Even when the seller believes there is clarity on how he will fit into the new owner’s plans, there are often surprises.    For this reason, a seller may decide not to be part of the transition and accept a lower sales price rather than work for someone else.

What Will Happen to Employees?

Often one of the trickiest aspects of a business sale is what will happen to the company’s employees.  Most business owners realize the professional and personal loyalty they owe to their employees.  After all, the success of the business would not have been possible without their hard work.   As a general rule, employees’ jobs are secure in a small business sale.  Smart buyers know that the ongoing success of and profitability of the business is highly dependent on the company’s employees who typically wear many hats and perform a variety of tasks that ensure operations run smoothly.  Additionally, they are intimate with customers and suppliers and have built solid relationships in these areas that are vital to the competitive advantage of a prosperous business.  A new owner is most likely to keep employees if the seller has taken steps to ensure the company team is working at their highest level even before an owner looks for a sales opportunity.  Lean, efficient operations reduce the likelihood that headcount will be trimmed after a business sale.  Developing a solid management structure that requires accountability will provide the new owner with a team who can make decisions in the absence of the seller.

But when and how to disclose a pending sale to employees can be one of the most difficult decisions a seller must make.  Business owners and experts are divided on the best approach to take when it comes to addressing the subject with employees.   Some assert transparency throughout the process is the wise choice, while others contend that revealing sales intentions to employees will adversely affect the outcome of the sale.  Here is a look at both options.

Keep People Informed

The rationale for this course of action is that the nature of business sales negotiations make it nearly impossible to keep them a secret.  It does not take long for employees to realize that a sale is planned.  Rather than risk rumors which cause a mass exodus, morale problems, distractions which impact productivity, or unnecessary stress on staff, an open-book culture will allay employees’ concerns and keep them engaged in their work.  The likelihood of a successful sale increases if the owner can assure the buyer that the team will remain intact.  Such guarantees are not possible if employees are kept in the dark.  Additionally, an owner can emphasize that consistent high quality work will encourage the new owner to keep staff after the sale. 

Keep Plans Quiet

·        News of a possible sale can cause confusion, anxiety and staff departures.  Sales negotiations are far too volatile and discussing a deal with employees can put them on a roller coaster when things fall apart at the last minute.  The length of time it takes to complete a sale—2 years is not uncommon—can create a long period of uncertainty.  If a large number of employees or key individuals leave during sales negotiations, the buyer may walk away, or the seller may have to accept a lower sales price.  Another risk of disclosing sales plans is that employees may tell customers about it.  Apprehension about the changes may trigger the loss of business at the time when it is most important to keep sales strong.

Successful businesses typically have key employees who would need to stay on to assure a smooth transfer of ownership.  Sharing confidential information with these individuals about the sale is necessary in order to provide assurances to the buyer that the knowledge and skills of these employees will remain with the company, for at least a period of time.  Retaining these employees is a point of negotiation with the seller who can offer bonuses and compensation packages to encourage employees to work for the new owner.  Creative retention plans that provide incentives for employees to stay on through the transition period reduce the risk of declining morale, decreased productivity, loss of employees, and possibly, customers.   The seller must use his best judgment as to the ideal time to bring these employees into the confidence of sales discussions.

Even when the buyer shares his staffing plans during the sales process, the eventual outcome may be different than what was contemplated.  Some employees may lose their jobs, or the new owner may bring in new employees.  It is up to the buyer to manage the integration of all employees into the new culture.  A seller and his employees who continue to work for the new owner should be prepared for change.

This is Part IV of a four part series on selling a business.  Read C3 Advisors’ blog for Part I: Build for the Buyer, Part II: Process Pays and Part II:  Tax Tactics.

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