Ownership Transfer and Employee Security

When we start planning for the sale of a company, many owners ask me about sharing information with employees. They are naturally concerned that an ownership transfer will cause their workers to seek more secure positions elsewhere.

This is true whether you anticipate an external sale to a third party, or an internal sale to employees and/or family. It usually isn’t the new owner who is feared, it’s the absence of the old. If you are the founder of your business, the problem is especially acute.

Most owners don’t harbor delusions of grandeur. They know that building a business is mostly hard work. You have to be smart, but not necessarily a genius. A reasonably intelligent person with the proper skills could likely do your job, especially if you’ve developed management talent throughout your organization.

Selling the business is also something of a self-fulfilling prophesy. If it really can’t survive without you, it isn’t saleable anyway.

Any ownership transfer takes some time. Marketing for and negotiating with a third-party buyer may encompass a year or more. Transitioning to internal buyers is usually a multi-year process. The timing of announcements to employees is driven by both external and internal considerations.

The external forces are defined as those that require cooperation from key personnel. If your managers are to be the buyers, the need is obvious. When you are selling to a third party, the cooperation of key management is usually needed to prepare listing and due diligence information.

If you are informing key personnel early in the process, it is also a good time to discuss “stay bonuses;” incentives for working through a post-closing period. We’ll discuss structuring those in another column.

In most cases, I recommend making a general announcement to employees as soon as a deal is certain. For an internal sale, that is usually when all the ownership acquisition documents are signed, even if the final transfer is several years away.

In an external sale, “certain” is a less definable concept. It is not certain when you sign a Letter of Intent (LOI). It probably isn’t certain when you sign the purchase agreement. After any necessary financing is in place, and the buyer has cleared all the contingencies to purchase, it is usually  time to make the announcement.

There are three “internal considerations” that drive the timing of a general announcement to employees.

  • Clarity: Presenting them with a fait accompli, including details regarding the new owners and timeframes, avoids unnecessary speculation about what might happen.
  • Control: As you disseminate the news to customers, vendors, bankers and other professionals, it will get out. You want the employees to hear the real story from you, not second- or third-hand.
  • Inertia: The longer the time frame between your announcement and the actual event, the more likely the employees are to settle in and take a “wait and see” attitude.

Handled correctly, an ownership transfer offers your staff more security, not less. Ask them if they thought you were immortal. Unless they are deluded, logic dictates that some arrangement was needed to keep their jobs after you moved on. As a caring owner, you’ve taken steps to secure their future.

Leave a Comment