A Buyer’s Biggest Nightmare
Three months after closing the sale of a specialty contracting business, I received a distressed call from the buyer. “The key employee left—and took four other employees with him.” The buyer, deeply upset, was at a loss for what to do next.
The buyer and key employee had met just before closing, and all seemed well. The buyer felt assured that the key employee was on board. However, what no one knew was that the selling owner had previously promised to sell the business to this key employee, who felt betrayed when that didn’t happen. As a result, the key employee not only left but also took a portion of the team and started competing directly with the buyer’s new business.
Situations like this can be devastating, but they are also preventable. Did the owner genuinely commit to selling to the key employee? Was there even a discussion about terms? And could the key employee have financed the purchase? Ensuring a smooth transition with key employees is crucial when buying or selling a business. Here are a few strategies for sellers and buyers to help keep valuable employees engaged and committed during a transition.
1. Ensure Key Employees Sign an NDA
If you decide to disclose the sale to key employees, they can be a valuable asset during buyer-seller meetings. Involving key employees in these discussions can help demonstrate your company’s strengths, add credibility, and streamline due diligence. Before sharing any sale details, have them sign a straightforward non-disclosure agreement (NDA) to ensure confidentiality. Keep the language simple and direct to avoid resistance.
2. Offer a Sale Bonus
When you inform a key employee about the sale, consider offering a “sale bonus” as a token of appreciation for their contributions and as an incentive for a smooth transition. This gesture can go a long way in fostering goodwill and encouraging a cooperative handover. The bonus amount varies based on transaction size and the number of key employees involved, but a good rule of thumb is to allocate 5-20% of net sale proceeds (after fees and taxes) for bonuses.
3. Implement a Stay Bonus
A “stay bonus” benefits both seller and buyer, and often both parties contribute to it. This bonus can be structured to pay out in stages—such as after six months and again after one year—helping to retain critical employees during the transition period. For long-term commitment, an ongoing bonus could be tied to future gross profits, rewarding employees for their role in building the new business’s success.
Dyanne Ross-Hanson, CEO of Exit Planning Strategies, calls this “value sharing.” In many deals, buyers readily agree to cover capital expenses but hesitate to invest in an ongoing bonus plan for key employees. A well-structured bonus plan could allow key employees to earn up to 50% of their salary in bonuses. Key employees should be seen as investments in future profitability, not as costs. In a recent transaction, a disagreement over the annual bonus rate—50%, which was the key employee’s expectation, versus the buyer’s offer of 15-20%—led to the deal falling apart.
In Conclusion
When buying or selling a business, key employees are among the most critical assets to assess. Their loyalty and expertise can significantly impact the future of the business. In the case of the specialty contracting business, the departure of five employees dealt a severe blow from which the company never fully recovered. Many things keep a buyer up at night prior to closing yet having key employees leave is one of their biggest nightmares. Sellers and buyers should collaborate to incentivize key employees to stay, using tools like sale bonuses, stay bonuses, and annual bonuses. These strategies can create a more stable transition and help safeguard the business’s future.
This article was written by Sam Thompson, CBI, M&AMI. Sam is the president and founder of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million conference and event management company. If you have questions about this article and would like to connect with Sam click on the link below.
