IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Erin Ward. Mr. Ward is a senior business broker at IBA (www.ibainc.com):

The Key Employee Dilemma (KED) in the Sale of a Business

Every business owner who is considering selling his business has a series of hurdles to overcome to complete a successful sale. Some of these hurdles may include gathering all the relevant information for a sale, calculating the right value for your company, and how to satisfy that Key Employee. In some instances, the Key Employee (KE) can determine the success of the sale.

KEY EMPLOYEE DELIMMA

The Key Employee(s) are vital to almost every business. The Key Employee knows the ins and outs of the company and how to run it when the owner is away or dealing with other issues. They are vital to the success, but in some cases the Key Employee has too much sway in the sale of the company. The KE can sniff out when the owner is thinking of selling and will want concessions to stay after the sale. This is the worst-case scenario, but it does happen, and the owner needs to come up with a solution, so they can successfully sell their company.

REAL LIFE EXAMPLES

A KE is incredibly important in getting the new buyer up to speed after the transition period. The KE knows the accounts, billing, customer service and client relationships that a new owner lacks. I can recall two instances when the key employee played a pivotal role in the failed sale of a business.

Manufacturing business

A few years ago, I had a manufacturing business for sale in greater Seattle area. The owner agreed to the terms, with the buyer buying the business and real estate in a long negotiation. As the buyer was doing his due diligence, the owner became concerned about his key employee ‘office manager.’ The ‘office manager’ had ran the company after the owner battled a long illness, which forced him to sell the company. The ‘office manager’ was involved with the sale of the company and provided the necessary documents throughout the process. But after the Letter of Intent was signed and due diligence entered the 3^rd week, the owner had a major ask for the buyer: ‘Guarantee her salary for 5 years or give her a percentage of the business or the deal is off.’  The ‘office manager’s’ salary had ballooned to well over $150,000 per year and was 5 years from retirement. The buyer would guarantee 1 year and would not give her any ownership in the new business. In the end, the owner, ‘office manager,’ and buyer could not reach agreement on satisfying the Key Employee and the deal fell apart.

Skilled Employees

Recently, I had the opportunity to represent a company with highly skilled employees, where they must go to school to get their certificates to work. The highly skilled or ‘techs’ can be found in the automotive industry, HVAC, electrical, plumbing, etc. industries. Today, finding and keeping skilled employees are difficult and subject to ‘poaching’ by other companies in search of talented techs. After reaching a deal with the owner, the seller had a major ask for the buyer to meet his key ‘tech’ as he brings in most of the revenue of the business. This was the condition of the sale and if the key ‘tech’ left, then this would jeopardize the deal. This key tech was being ‘poached’ and offered an increase in his base pay by multiple companies in the area. After the meeting, the buyer had agreed to his salary demands with a written contract and provision that within 2 years he would be given a percentage of the business. The key ‘tech’ turned down this offer and decided to leave anyway. Again, the deal fell apart, and basically making the business unsellable.

SOLUTIONS TO THE KEY EMPLOYEE DILEMMA

So how does a seller satisfy his key employee(s) when selling his business?

1. Incentivize, Incentivize, Incentivize- Yep…As easy as this sounds, get the check book out. I have had several transactions where the buyer agrees to stagger a bonus over 30, 90 or 180 days to keep those employees. It can be as little as a $500 stay on bonus, with a larger amount at the 180-day mark. I have also had instances where the Seller gave the KE a salary increase, with buyer consent, to stay on after the sale.
2. Change of Title-Recognizing the KE for the work that they have done is also worthwhile to keep them to stay through the sale. A title bump or increase in responsibilities keeps the KE engaged and committed to the new owner.
3. Flexible Working Conditions-A new buyer has a difficult task to integrate their personality with the KE and the workers that are inherited. Create open communication and flexible working conditions for KE. This recognizes that work-life balance and the need to be open to the needs of the KE.
4. Team Building/Conferences– Build team building exercises to gain trust and have some fun bonding with the new employees. Also, invite the KE to those conferences or trade shows that are relevant. Give them the resources and opportunity to take on more responsibility.

CONCLUSION

The Key Employee Dilemma is real and can stop the sale of your company. Be aware of your KE when thinking of selling your company and make sure you are in a place that the KE will not affect the successful outcome of the sale.  Get out in front of it very early in the process and make sure the KE will not derail a sale of your company.

If you have questions relating to the content of this article or the process associated with selling a business, Erin Ward would welcome the opportunity to talk with you. Mr. Ward is a M&A generalist by choice with experience selling a broad spectrum of privately held companies and family businesses.  Mr. Ward can be reached at (425) 454-3052 or erin@ibainc.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.