When should I tell my employees the business is for sale? Part 1

|Acquisition Q&A

Many business owners struggle with this question as they try to balance confidentiality of a transaction with making sure their employees don’t feel like they are being kept in the dark about the future of the company they work for. It’s a hard line to draw. While some owners are very open with their employees and don’t like the idea of keeping something big from them, it’s also important to recognize that lots of deals fall apart. They blow up because buyer and seller can’t agree to final terms, the buyer uncovers a red flag during diligence, financing doesn’t come through or one of many other reasons. Just because you are under a Letter of Intent doesn't mean it's time to shout your news from the rafters.

As an owner, you want to make sure you’re 95% to closing before you start telling employees. If employees are notified about a potential transaction too early, there’s a chance that suppliers or customers could find out through the grapevine or worse… competitors who can use your potential sale against you and go after your customers. It’s really important to keep “the circle of knowledge” small. Especially when there is risk the deal may fall apart and you end up retaining the company even though you’ve disclosed you were selling. At that point, you've shown your hand. It can cause a level of distrust on many levels – employees who know the company’s future is uncertain, customers and suppliers who know there may be disruption with a new owner so they could look for a new trusted vendor/customer, or competitors who could use this knowledge as an opportunity to poach those uncertain customers.

We often advise business owners to wait until the last 1-2 weeks before closing to notify their employees of a sale. At this point, the diligence should be done, the purchase agreement just about complete and both sides have confirmed there aren’t potential deal-killer contingencies still out there. There should be a great deal of confidence on both sides that the transaction will be consummated.

There may be situations where you need to carefully bring a few key people "into the know" earlier. Handle this cautiously. Here are two scenarios that may apply:
1. You need help compiling diligence. You may need your CFO to help support financial diligence collection or your Technology Manager to show the technical capabilities of your proprietary software. Be sure that the select few you bring in understand the requirements of their task and can handle the work without letting others know what's going on.

2. The buyer needs to meet key management. When a business is absentee run, buyers often require an introduction to select key managers prior to closing. They want confidence in the team running the business. If you're absentee and won’t be there after closing, the buyer wants confirmation that the continuing leadership is solid before they close. In these scenarios, it’s important to keep the number of contacts small and impress on these employees the need for utmost confidentiality until closing. Once the cat’s out of the bag, it’s hard to keep it 100% contained so holding these introductions as late as reasonably possible while also giving the buyer the access they need reduces likelihood of rumblings among your employees.

When it’s time to actually share the news, there are several best practices that buyers and sellers employ to make it as smooth as possible. We’ll share those next time in Part 2.

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