Ask the Advisor: When to Tell Employees You Are Selling

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Q: I’ve decided to sell my business, when should I tell my employees?   I don’t want to lie to them, but I don’t want them to quit on me either.

— Jeff (from Florida)

A: When selling your business, there will come a time when you will need to tell your employees, the people that you’ve relied on for years, if not decades, that you are selling your business.  This is certainly one of the aspects of the sell-side process that causes a tremendous amount of anxiety for sellers, but through proper preparation,  you’ll be able to tell your employees on or immediately before the closing, which is the best time to tell them.

Some owners decide to tell employees at the beginning of the process and most of the time, this is a big mistake.   Once the employees know, they will do one of the following:  1)  take a wait-and-see attitude and react to every single hiccup in the deal (and believe me, there will be many hiccups); or 2) prepare their resumes and preemptively jump ship.  The sale of a company is an emotionally taxing event for the seller in and of itself, so think very hard before you invite the additional stress of having your employees scrutinize every buyer and ride along with you on the emotional roller coaster.

Although it is very easy to stay quiet during the initial stages of a deal, once the suits start showing up to the office, anyone there with an IQ above 20 will start piecing things together.  Successful sellers do the following:

Get Stay Bonuses and Contracts Negotiated in Advance

Get all employees under non-competition agreements with assignability provisions in place prior to the sale process.   Negotiate stay bonuses with your key employees before you even mention the word “sale.”

Get Your Story Straight
I think it’s important to be honest with your employees, because they will come to know the truth in the end and you’ll lose face.  That doesn’t mean, however, you should give them the straight scoop.  Instead of mentioning an outright sale, you might let them know that you are exploring strategic alternatives, such as seeking financing or an equity infusion, and when the day of the sale comes, you’ve ultimately decided that a sale is the best way to maximize firm value.

Set Up an Offsite Data Room / War Room

Your advisor should be on this one from the word go.  By setting up a room in a local hotel or offsite office, you’ll be able to hold all meetings offsite, and avoid prospective buyers from showing up at the office during business hours and drawing unwanted attention.

Bring a Few Insiders into the Tent

It’s a lot of work selling a business and you’ll probably need the help of a key person or two.   Bring these individuals in up-front and have them sign a confidentiality agreement (and if they breach it, they’re history… no more job and no more stay bonus).

Be Prepared for the Worst

Although you may do everything possible to stay tight-lipped, be prepared for a leak.  When someone confronts you with the news, the worst thing you can do is go hide in your car while you figure out how to deal with it.  Prepare an internal memo for employees and an external memo for key customers early on in the sale process.  Prepare fact sheets and rehearse talking points with your advisors at the early stage of the sale process.  When the rumors start flying, poor communication and delay creates anxiety among employees… be prepared.

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