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  • Transitioning Employees in a Hospitality Industry Business Sale

    Mar 31, 2020

    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 Oliver Kotelnikov. Mr. Kotelnikov specializes in the sale of hospitality businesses and is IBA’s representative in the Washington Hospitality Association ( https://wahospitality.org/).

    Transitioning Employees in a Hospitality Industry Business Sale

    While a simple asset such as a vehicle, boat, or investment property can just be sold, a business must be transitioned.  In a sophisticated, nuanced sale of a business, a transition of many moving parts must occur for a transaction to successfully be completed. Depth of market knowledge, industry experience, and relevant, professional skill set are required to successfully navigate the highly nuanced process of transitioning a business. Customer, vendor, and landlord relationships are all prime examples of transactional pieces that can be damaged in transit and need to be handled with care if a business is to continue operations at historic levels or better under new ownership.  Washington’s current robust, economic climate has gone hand in hand with increased labor challenges for business owners, retaining existing employees through the change of ownership has been a key focal point in many recent IBA facilitated transactions.

    The Seller

    In the interest of maintaining profitability and maximizing their retained earnings while still at the helm, the sellers should continue running the business effectively until the official change of ownership has occurred.  This objective will be challenging to accomplish if the workforce gets wind of the sale in a form of a rumor or incomplete, inaccurate information, and begin to view their current employment as temporary while actively seeking other opportunities.  The narrative around when and how the news of the sale is delivered to the staff will have significant implications on the seller’s remaining tenure as the owner of the company.  It is important to maintain transactional confidentiality until a strategically chosen time of controlled disclosure has been established.  A two-part approach, with the initial message delivered by the seller to the staff, followed by an introductory meeting with the new owner is an effective strategy I commonly employ as a professional intermediary.  Regardless of the format, the messaging should be tailored to convey confidence in the future of the business and alleviate concerns regarding job security.

    The Buyer

    Assuming the new owner has invested in the acquisition of profitable business model, it is not in his or her best interest to come in with landslide human resources modifications. Due diligence, review of financial documents, and operational knowledge conveyed by the departing owner will provide a solid base of foundational knowledge to the buyer about the business. A buyer’s previous relevant experience will also help facilitate a smooth transition. But historical information about the business is merely a freeze frame, peekaboo view of the overall landscape and even the most seasoned entrepreneur will only be able to draw so many parallels from one venture to the next.  In the initial stages of transition, the new owner will often rely on the seasoned group of employees to supply the tacit knowledge required to successfully navigate the day to day operations.  Deferring to experienced staff, and accepting the temporary, but a somewhat conflicting and uniquely hybrid position of authority and apprentice is the new owner’s fast track to gaining a full, comprehensive understanding of operations and ultimately becoming an effective, knowledgeable decision maker.

    The Lender

    Most purchasers will seek financing to complete the acquisition of a business.  The public domain widely recognizes the financials of the business and the borrower as staple components of successfully securing funding for the transaction.  The lesser-known, key pieces heavily impacting the decision of the lenders are the buyer’s relevant experience, transitional training provided by current ownership, and the carry over of the existing staff.  For the business to continue operating at profitability and service the debt, a clear roadmap of the transfer of operational knowledge will need to be put in place.  While the departing seller’s training obligations are certainly reviewed by the lender and taken under advisement, the remaining relationships between the buyer and the existing employees are considered to be far more impactful on the long-term well being of the business.   Perspective lenders will frequently monitor any fluctuations in the staff throughout the loan application process.  Substantial changes in the labor pool, especially key employees, can be viewed as either a decrease in the value of the business or increased risk of lending.  As a result, terms of the loan may be amended or financing pulled altogether.

    A Common Goal

    Once the terms of the deal have been agreed upon, the buyer and seller should begin to work collaboratively to smoothly transition the staff.  Coordinating a strategic disclosure to deliver the news to the staff will require thought and planning and should take place at a transactionally stage appropriate time.  Absent the control of timing and messaging, the narrative can adopt an unpredictable character of its own, creating an environment of uncertainty, and damaging employee morale.  Handling the transition of employees with care will benefit both parties in achieving a common goal and ensuring the continued success of the business in the future.

    If you have questions relating to the content of this article, the process associated with preparing a business for sale, or selling a restaurant or hospitality business Oliver Kotelnikov would welcome the opportunity to talk with you.  Mr. Kotelnikov can be reached at (425) 454-3052 or oliver@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, and real estate 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”.

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