InSight

Exit and Growth Strategies for Middle Market Businesses

Could Keeping Employees in the Dark Cost You the Deal

By Kim Levin | Apr 03, 2009

When selling a business there are many layers of confidentiality and they are all a major concern to business sellers. More often than not, when we hear a seller express concern about confidentiality they are primarily focused on the possible damage competitors might cause should they learn that the business is for sale. This is a real concern about which many articles have been written; however, another layer of confidentiality which has received less attention is that which relates to employees.

Sound working relations with employees are an important component of every business. While confidentiality can be a far greater perceived problem with regard to employees than an actual problem, with proper planning it is possible to minimize the risk of untimely disclosures.

While confidentiality is an important consideration, employees generally do not jump ship upon learning that a business is for sale; however, proper timing as to when to share such information can contribute to a smooth transaction and reinforce the buyer’s willingness to proceed to the closing table.

Although buyers are generally not introduced to customers or suppliers until the final stages of due diligence and the sale appears to be imminent, buyers will insist upon meeting and interviewing the seller’s management team during due diligence. In most businesses, the company’s management team is crucial to the ongoing success of the business. For this reason we like to discuss with business owners the pros and cons of including key members of the management team in the sale process from the beginning.

Keeping important members of your management team in the dark could cost you the deal. Most key members of a management team invest their time, energy and effort to help build the company they work for and it becomes a major factor in their lives. They feel they have earned the right to know about major corporate initiatives, even if it makes them nervous. All too often we have witnessed business owners hastily call a “damage control” meeting when employees become suspicious that the business is being sold.

When the management team is informed of the owner’s interest in selling the company, the focus of the discussion should not be on the seller’s plans for retiring or moving on to a new opportunity, but on how the sale will benefit the future growth and prosperity of the company. The seller needs to convey to the management team their jobs are safe and the buyer will provide the company with added financial resources, management expertise, or incentive to grow that the seller may not currently possess. Such a discussion validates the contributions key managers have made to the company, and avoids possible feelings of betrayal or resentment.

It is seldom that we encounter a senior management team that has not been a key element in the success of a business. From our experience, the properly timed sharing of information about plans to sell a business is more likely to keep the management team intact through the closing.


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