Employee Retention in a Business Acquisition

Feb 19, 2019

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 business attorney Michelle Bomberger of Equinox Business Law Group (www.equinoxbusinesslaw.com):

Employee Retention in a Business Acquisition

What are you looking to acquire when you’re buying a business?  Of course, you’re looking for a business model that is sustainable and scalable and revenue that is consistent and profitable.  You’re also looking out for risks that could thwart your success. In many business acquisitions, the buyer is dependent on the existing management team to maintain customer relationships and keep the wheels turning.   The employees are committed and loyal to the selling owners – but are they committed and loyal to the business? Will they be committed and loyal to you as the successor? It’s hard to know and it’s a significant risk for any buyer who needs key employees to stay on board after the closing of the deal.

Here are a few tips for how to maximize the connection between you as the new buyer and the existing team of the seller and keep them committed to the ongoing business’ success:

  1.  Understand the Culture   The softer side of the business can be very difficult to gauge in the buying process.  As the buyer, you get very limited access to the employees in advance of closing and you rarely get an objective view of the inner workings of the company.  Furthermore, the seller is not likely to divulge problems with company culture or employees. Therefore, you must take an investigatory approach. Ask questions of the owner not only about the hard facts of the employee base but what is the seller’s management style and the company’s culture.  Try to understand the structure of teams and how employees interact with one another. Look at turnover rates or productivity metrics by department and see if there are trends. If you have access to other members of the team through due diligence, even the bookkeeper, ask some probing questions about the environment and workforce.  Sometimes the non-owner internal and external team members will share more openly. Take what you learn from these conversations and do further diligence to investigate underlying trends. Finally, consider whether your management style is consistent with the seller’s style. If you’re highly analytic and structured and the existing company and management is more casual, you’ll need to consider how you’ll bridge that gap.
  1.  Plan the Introductions  Buyers are typically introduced to employees as follows:  1) Casually introduced as the potential buyer during due diligence; or 2) Formally introduced as the buyer to the employee group just before or after closing.  The seller drives this process and tries to minimize their risk of exposing the employees to the buyer too soon. The buyer wants to know about the employees’ intentions, though, as the employees’ commitment to the business and the buyer is essential to the deal.  Despite the importance of this step, it’s often sidelined during the due diligence process because everyone knows employee introductions is one of the last items on the to-do list. Other due diligence is more objective and pressing. By the time everyone is ready to sign and has enough confidence to make the introductions, time is running short to closing and it’s rushed.  Often this rush is felt by the employees when the introduction is finally made. As you consider the company you are buying, consider also the employees’ perspective. Understand the cultural and management issues outlined above. Ask yourself what the employees will be most concerned about based on what the differences will be between seller and you as buyer. It’s easy for a seller to tell the team that nothing’s going to change – but employee’s don’t believe that.  Your introductions should be planned and well thought out, addressing their fears with the seller’s support. Acknowledge that things will change and communicate clearly and often in a way that alleviates their fears and creates confidence for them moving forward.
  1.  Incentives  One strategy commonly used  by buyers to minimize the departure of employees is financial incentives.  Buyers usually match the compensation and benefits package that the seller offered to the employees prior to the transaction.    The focus is on not changing anything versus deep thought as to whether the employees might value a different plan or package of benefits. Accrued vacation is one area that can be contentious.  If an employee has accrued but unused vacation with the seller, they want to retain that accrued vacation with the buyer. Depending on the deal structure, the buyer may be forced to acquire the liability to “keep the employees happy”.  Again, when looking at incentives, consider what the employees care about and communicate to why a change is beneficial to them.

You cannot guarantee that a key employee of the seller will stay after an acquisition.  Even when you offer a financial incentive to stay, sometimes the shift in culture, role, or even just the feeling they had of “family” with the seller, will override that financial incentive.  As a business owner, you know your most important asset is your people. In an acquisition, you are “acquiring” people and they have a choice just as you have a choice. When you find a business where you are a match on both your business acumen and your leadership style, you’ll likely find success in both operational and human resource management.

If you have questions related to employee retention in a business acquisition transaction or legal issues confronting of entrepreneurs Michelle Bomberger would welcome the opportunity to discuss the situation with you.  Ms. Bomberger can be reached at (425) 250-0205 or michelle@equinoxbusinesslaw.com

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community 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”.