Business Exit Notifications to Employees - To Tell or Not to Tell

By Darren Cherry

Many owners struggle with when to tell employees about exit plans. Generally speaking, this is one of those few times where the “it depends” response comes into play. There are a few cases where the answer is a bit clearer.

1.) KEY EMPLOYEES

With this group of players, you should be as transparent as possible after engaging a broker/investment banker. The rationale is that potential buyers will likely want to speak to these employees during the due diligence. These employees will also typically add value in the Confidential Memorandum and Management Presentation preparation.

CAUTION 1: These employees must maintain confidence and perform a lot of extra work associated with the process. Often, owners will provide key employees special compensation after the transaction.

CAUTION 2: You may have key employees who resemble the “old refrigerator” adage, and you know confidentiality is not in their vocabulary. Here you have to tread lightly, perhaps exclude them initially and set up interviews closer to the close date where things have a higher probability of closing.

2.) EMPLOYEES THAT BENEFIT FINANCIALLY FROM THE SALE

Some companies were “built to sale” and have had an open discussion with employees on an ongoing basis. Some even grant employees some form of future equity. In this case, the best course is sharing the timeline just as you would with key employees.

3.) EXIT PRIORITY – PRICE & CASH AT CLOSE

For owners that prioritize a maximum price and cash at closing, it may be best to limit the conversation to only key employees. In this case, you may attract buyers that are more likely to alter staffing (e.g. competitor).

4.) ALL OTHER EMPLOYEES

While you may feel an obligation to be transparent with employees early in the process, here are some potential drawbacks that should go into your decision:

* Uncertainty - deals fall through
* Confidentiality - risk of customer disclosure
* Stress - people may start panic exiting
* Distraction - harder to maintain much needed focus

Other than key employees and built-to-sell firms, the error on the side of delaying disclosure may be the most prudent path.

Owners should consider succession/exit planning as a component of their ongoing business strategy instead of starting when they are ready to exit.

Get in touch to talk through succession/exit planning.