Lessons Learned from Broken Deals

“Take Care of Key Employees When Selling Your Business”

We had found the perfect buyer, a strategic in the same industry. It looked like this transaction had a good chance to close. The owner of this successful Twin Cities business, who was living in another state, had done a nice job of removing herself from the operations. She had one key employee who ran the firm’s two offices and was critical to ensuring the business’ profitability.

We signed the non-binding Letter of Intent that included a cash offer of $3 million, and the buyer began his due diligence. At the top of his list, he wanted to meet this key employee. I usually like to have such a meeting after we’ve checked off a few other obstacles such as continuation of the lease with the landlord and the deep dive into financials. This way, if the buyer decides to walk, we will not have prematurely informed the key employee of the owner’s intent to sell (an important point, as employees are rarely privy to an owner’s aim to sell). Yet the buyer insisted on the meeting, so we moved forward introducing the buyer to the key employee.

When Should You Tell Your Employees You’re Selling?

The best answer is when all documents have been signed and the money is in the bank. Yet, that is difficult to accomplish. Especially with the larger deals, buyers will insist on meeting with your key employees.

If you do inform a few key employees prior to closing, you will want to have them sign a non-disclosure agreement. Once this agreement is in place your key employee/s, with knowledge of the sale, can become a great ally. They can help with the cumbersome details of due diligence and join you in buyer meetings to help sell the business’ value and close the deal.

The Buyer Meets the Key Employee

We arranged to have the buyer meet the key employee and the encounter went extremely well. The buyer felt comfortable with this employee staying on in the same role and the key employee felt this strategic buyer would help grow the business while offering her future personal opportunities.

My seller and I were very excited and we felt the chance of this closing took a positive turn. Yet, two days after the meeting, the key employee realized how key she was to the company. She went back to the seller and said her annual salary now needed to be increased by 50%. The seller told me this was not her problem, and the buyer would need to deal with it. I told her it was a problem for all of us and I needed to talk to the buyer about the request.

I spoke to the buyer about the key employee’s salary request and he said his offer did not include such a large salary increase. He would not agree to the salary boost.

A Solution to Maintaining a Key Employee When Selling

I went back to the seller and said there was an easy solution. She needed to offer the key employee a stay bonus. We would draft an agreement that indicated if the key employee stayed on for one year, the seller would pay her a $35 thousand stay bonus. I told the seller I’d share this plan with the buyer, and I felt certain he would agree to our solution. The extra year should allow him time to evaluate the key employee plus he’d have one year to budget the pay increase for future years.

The seller refused to implement the stay bonus. I do believe she felt the employee would accept the situation and would stay through at least closing.

The Result

After hearing she would not get the pay increase, the key employee resigned with proper notice. Hearing this the buyer walked. We decided to take the business off the market for a few months to give the seller time to replace the key employee. This took longer than expected yet the seller eventually found a new key employee. However, due to the lapse having proper management in place the financials suffered.
Eighteen months later we brought back the original strategic buyer with the new key employee and closed the deal. Not for $3 million though. Since the numbers had dropped, the agreement was $1 million at closing and the rest in an earn out. It was a seven year earn out and the seller saw significantly less in earn out money.

Lesson Learned

When selling your business make sure to take care of your key employees, especially in this current employment environment. By not keeping her key employee in place, this particular seller lost approximately $1.7 million dollars by not agreeing to pay a $35 thousand stay bonus.
Meet with your M&A attorney and draft the proper stay bonus document that will allow you a successful exit. Not only is it wise to let your buyer know there is a plan in place to incentivize the key employee to stay, but it also could be looked at as a “thank you” from you to your key employee/s for all that they have done to make your business successful.

By Sam Thompson, CBI, M&AMI
Sam is the president and founder of M&A firm Transitions In Business. He is a Certified Business Intermediary (CBI) and a Mergers & Acquisitions Master Intermediary (M&AMI) who has helped countless business owners successfully sell their company. Transitions In Business is a Minneapolis based M&A firm who specializes in selling privately held B2B, healthcare, transportation, manufacturing, distribution and construction/trade services businesses in the lower middle market.