Keeping Key Employees when Selling Your Business

Six years ago, I was selling a business whose owner lived in another state and was working only about 10 hours a week.  The business was operated by one key employee.  We engaged with a solid strategic buyer that submitted a letter of intent with an all-cash offer that met the seller’s expectations.

The buyer realized how important this key employee was to the business and requested a meeting right away.  The meeting went well, and both the buyer and the key employee felt good about the future transaction.

After the meeting the key employee went back to my seller realizing how “key” she was.  She now required a 50% raise to her salary.  The seller told me this would be the buyer’s problem as the seller would not be the owner moving forward.  I discussed the dilemma with the buyer, and he said his offer was based on paying the key employee her current salary.

I went back to the seller and explained that there is an easy fix to this problem:  pay the key employee the difference as a stay bonus if she would stay on for one year.  This bonus would be paid at the end of one year.  We would then tell the buyer this plan was in place.  The seller did not think the key employee was going anywhere; that it was a bluff and decided not to pay the stay bonus.  The key employee was not bluffing, she left.  The deal dissolved and the business went back on the market.

After the key employee left, it took months to replace her.  In the meantime, the business’ profits declined.  We eventually sold the business to the original buyer but not for the original all cash offer.  The new negotiated offer was a partial cash payment at closing with the balance to be paid in a seven year earn out with the total being lower than the original deal.

When you begin the process to sell your business, think through who your key employees are and put a plan in place to make sure they stick around.  To protect confidentiality, the ideal situation is to not tell any employees you are selling until all documents are in place and the money is in the bank.  Realistically this may be impossible if you have a few key employees and you know the buyer will need them.  Here are a few things to consider when you decide to share your plans to sell with key employees:

Get Confidentiality Agreement/s Signed 

Before you inform your key employee/s that you are selling have them sign a very simple confidentiality agreement.  The simpler the better.  If it has too much legal jargon, they may not sign it.

Provide a Stay Bonus

Design a stay bonus that will be attractive to your employee.  This could be based on a percent of their salary (usually 10-25%), or even a percent of the selling price.  A portion could be paid after six months and the remainder after one year.  If the employee leaves before the specified date, they are not paid.  If they are let go, due to no fault of the employee, then payment to the employee is determined by how the agreement is written. Not only will the stay bonus help retain the employee, but it also is a nice “thank you” from you to the employee for their dedication.

Put the Key Employee into Action

With your key employee committed to confidentiality and motivated with a stay bonus, you now should have them participate in the transaction.  Assuming they present your firm well, put them front and center in the buyer presentations and enlist their help through the time-consuming due diligence.  This should help close the deal.

Share with the buyer the stay bonus set up with your key employee/s to demonstrate there is a good chance the employee/s will stick around.  Having key employees engaged in the transaction and locked in with a stay bonus will maintain morale with customers and employees.  Buyers will appreciate knowing this wealth of knowledge will continue into their ownership and this should help sell your business.

This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming an intermediary, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.