EXIT STRATEGIES: Prevent the loss of key employees

In the pressure to sell a business, the entrepreneur often forgets that it is a team sport. While the business owner might be overjoyed to see keen buyers banging at the door, the rest of the employees may not be so excited.

Not only do they face a change of boss but they will be rightly concerned about their future employment, their job responsibilities and even whether their desk will continue to have a window view. If the entrepreneur is to realise the full value of the business, he or she needs to have the full support of the key employees throughout the sale process and beyond into the new ownership.

As a business owner or investor, you need to put aside traditional views of valuation based on EBIT multiples which reflect what you achieved in the business and embrace a more realistic view that the value of the business is what it can achieve for the new owner. Everything we buy, including a business, only has value for what we anticipate we can harvest from it, whether that be an experience or a good return on our investment.

Thus preparing a business for sale is simply about anticipating how we can maximise the future value for the new owner. Much of that value may be tied up in the active and positive participation of the current employees in the business under new owners. So what can we do to ensure that the new owner has the full support of those key employees who will help maximise that future productivity?

We need to examine three areas of concern for the new owner; what problems, risks and liabilities are inherent in the existing business; how easy will it be to transfer ownership and, lastly, how confident will the new owner be that he or she will be able to exploit the potential of the business post sale.

Firstly, our current employees can help put the business onto a low risk, profitable and resilient basis. For that to occur, we will need their active cooperation.

What we don’t want is for them to be antagonistic or hostile to the new owners, or to be disruptive or to undermine the sale process. Certainly we don’t want them to leave because they are concerned about their future with the business.

What we need to do is to involve them in the sale preparation and due diligence process and give them an incentive to work towards a common goal of selling the business successfully.

The next stage involves the transition to new ownership. We need to be confident the key employees will transition the core knowledge in the business. To do this successfully, there should be incentives involved to encourage them to stay around in order for the transition to occur.

Lastly, we want the new owner to have the highest chance of successfully running the business and, possibly, developing it to generate greater revenue and profit. We need to consider how we can structure the business to provide the best platform for that to occur. Again, this may mean some incentives for the key employees to stay with the new business to give it time to settle down under new ownership.

The buyer needs to have time to transition the inherent business knowledge to employees who are likely to be employed longer term with the acquirer. Since most resignations of newly acquired staff are likely to occur during the first year of the acquisition, putting in place incentives for key acquired employees to stay during the transition period can significantly reduce buyer concerns. Where the vendor has arranged this prior to the sale discussions, the buyer has some assurance that a major risk can be averted. This not only places the vendor in a more positive light, but can positively influence the value of the business being sold.

To do this right, it will require you to allocate some of the sale proceeds to encourage and compensate key employees. By preparing the business properly for the new owner, you are going to significantly increase the price you achieve for your business. Your investment in your employees will be more than compensated by the higher sale price.

Within the sale preparation process, senior managers will play a key role. The major stages are preparation, negotiation, due diligence, integration and on-going post acquisition operations. Within most of these stages, the current management are actively involved and they can either help make it work or scuttle it. Getting their support is, therefore, absolutely necessary.

Many entrepreneurs incorrectly believe they can carry this process off by themselves and continue to manage the business under new ownership. However, entrepreneurs typically make poor employees and most smart buyers know this and so they look to the management team to provide the transition to new ownership.

This view from acquirers is not unreasonable. Entrepreneurs are used to being in charge, making decisions without justifying them, taking shortcuts and accepting risks. They often don’t fit well into a bureaucratic structure where they have to report to a boss and take orders. In addition, they are most likely cashed up, want to take it easy or want to move onto their next big idea.

Similar logic can be applied to many in the senior management team. The CFO is unlikely to want to step down to being a branch accountant, the Sales Director to a Sales Manager or the Marketing Director to a Product Manager.

If they are all used to being part of the strategic decision-making process, they are likely to want to perform that role again. Furthermore, they may have done well out of the deal and want to move onto another venture.

The bottom line – few of the senior managers will go with the deal or stay long after the deal is completed. Smart buyers know this and therefore look to the second level management and key employees to make the transition successful.

The entrepreneur who wants the deal to be successful must find a way of gaining the support of second level management and key employees in both the preparation for sale and in the transition of knowledge across to new ownership.

If the people who have to make the deal work are uncertain of their future or resent the business being sold, they may leave or work to undermine the process. The entrepreneur, therefore, needs to bring them into the process in such a way that they will actively support the sale preparation and will be willing to transition to the new ownership in order to provide the continuity needed by the buyer.

Incentives need to be provided to management and key employees to encourage them to work towards a sale. This means ensuring they have sufficient incentives in the form of shares, options or bonuses to do so. Those who will be made redundant need to be provided with a bonus in order to stay until the sale is completed and provide them with a buffer to allow them to be retrained or look for new employment. Those key employees who need to be retained need to be provided with significant incentives to willingly stay on for, say, a year, to transition the business to the new owners.

Business owners who fail to put these incentives in place risk buyers walking away from the deal or facing a significant drop in sale price.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.