Business owners are used to calling the shots and controlling as much as they can of their company’s destiny. That’s part of the appeal of being an entrepreneur – being one’s own boss.
So it’s only natural for many business owners, if they’re considering selling their company, to see themselves as the one person who’s in control of the transaction. But failing to take their employees, especially their key people, into consideration during the process could be a big mistake, says Jason Hendren, the author of Things I Wish I Knew Before I Sold To Private Equity.
One question an owner must ask himself or herself, Hendren says, is how do I align my employees’ interests with my plans to sell? Conversely, hiding the news from them – and employees finding out in other ways – can make the owner’s life and sale of the company more difficult.
“Too many business owners are willing to risk their employees finding out about a sale in the wrong way,” Hendren says. “Owners are afraid of creating fear, uncertainty, and doubt, so they worry that if they tell the employees what’s about to happen, they’ll freak out and complicate matters in a way that will derail the sales process. Unfortunately, there is a higher likelihood of that happening if the employees aren’t told.
“A pending sale of the company can leave your people feeling threatened. That can lead to untimely turnover, which could cause potential buyers to question the company’s stability. So controlling the narrative with your people and incentivizing them can be crucial to a successful sale. The more an employee knows about their role and their compensation, the more likely they will be to remain engaged.”
Tips For Selling Your Business
Hendren offers these ways for owners to align their interests with their employees’ interests when it comes to selling the business:
- A tiered approach to communication. Hendren says this approach should start with the owner informing their chief financial officer. “This is the one person you need to have in lockstep with you,” he says. “Any investor who is interested in your company will ask for your financials, budgets, etc. Having that CFO in the know will make obtaining those documents easy and can give buyers confidence in your team.”
From there, Hendren says, an owner’s heads of departments and all employees whose departure during the sales process would be highly disruptive should be brought in.
- An options agreement. During the sale process, Hendren says owners should discuss incentives for executives, managers and key employees because it will keep them engaged. If an owner has long-term plans to sell (greater than 18 months), an options agreement can create alignment.
“For example,” Hendren says, “if your company is valued at $1 per share, you can structure an agreement in which, if the company sells for value above $1 per share, they get the increase in value over a defined set of shares. That kind of agreement says to the employee: Grow the value with us, and you will share in the success.”
- A phantom equity plan. The difference between this and an options plan is there is no option to buy the shares before the sale of the company. “The payout is triggered on a sale, and the value of the payout is dictated by the share price at the time of sale,” Hendren says. “This is also good for the employee because it can create a handsome payout at the time of exit without creating the incentive to buy shares early before the exit value is known.”
- A success bonus plan. If an owner’s sales timeline is shorter than 18 months, Hendren recommends the owner presenting employees with a success bonus plan. “That way,” he says, “you simultaneously communicate and financially align. I prefer to do bonuses that are based on the employee’s base salary. For the executive team, a bonus equal to one year’s salary is a great motivator while, for other key people, three to six months of salary will be meaningful.”
“Overlooking the human aspect of the sale could potentially derail an owner’s plans,” Hendren says. “Owners who are selling their business need to know the best ways to work with their employees throughout the process.”
About Jason Hendren
Jason Hendren, the author of Things I Wish I Knew Before I Sold To Private Equity, is a sought-after CEO coach, speaker, and exit-planning advisor. He is an award-winning entrepreneur and has extensive expertise as a buyer and seller of businesses. Hendren earned a BSIE and MBA from the University of Central Florida, where he supports first-generation scholarships, entrepreneurship programs, and the football Shareholders Society.