Meeting employees is risky business for sellers and buyers

By Dave Driscoll

Over the years of representing business owners, some buyers have adamantly wanted to meet the company’s employees prior to the closing of the sale.

That request is completely understandable. A buyer, in addition to understanding every aspect of the business operations, wants to get a feel of the “chemistry and vibe” with employees prior to the final closing and transfer of funds.

Naturally, any buyer wants to investigate and analyze every detail, but the seller bears the risk if employees are introduced prior to closing. Google “When to inform employees of the sale of the business” and 99% of the results are “after the sale is completed.” Disclosing to employees that the business is being sold is an enormous risk for the seller and can diminish the value of the business nearly instantaneously (which is detrimental to both the buyer and seller).

Business value is based on many elements including clients/customers, employees, revenue, and, most importantly, cash flow. Announcing to employees the sale of the business prior to closing can weaken the stability of all these aspects:

Clients immediately question how a change will impact them. They wonder if the company is experiencing financial difficulties or if the quality and customer service they expect will change with a new owner. To protect their interests, they will likely request quotes from competitive suppliers or service providers.
Employees will also fear the owner needs to sell because they are ill or the company is in financial trouble. This is compounded by concerns about how the new owner will treat them. Change makes all employees nervous, and their anxiety will certainly cause them to seek advice from friends and family…meaning confidentiality is lost! Loose lips sink ships! Employees may also start looking for other career opportunities.
- Truth be told, employees are one of the most valuable assets of a business. Despite their doubts, most employees will be more secure with a new owner. Sticking with the ship metaphor, why would a buyer remove the propeller from the ship? The new owner needs employees who know the drill, and the long-term health of the company is improved by the new owner’s energy and commitment.
Revenue- Sales revenue can be harmed by premature knowledge of a sale (for example, clients jumping ship). Future sales may decline, causing a need to trim operating expenses which could include previously-secure employees.
Cash Flow of the business can quickly be impacted as soon as confidentiality is breached by sharing the information with clients or employees – they will not keep the knowledge of the sale to themselves, and news will spread like wildfire. The universal measurement of the value of a business is the cash flow created by its processes. Loss of confidentiality resulting in reduced cash flow has a 100% correlation to the value of the business.

Simply put, reduced revenue means reduced cash flow which equates to reduced business value.

Compromising the business in this way is detrimental to the buyer and seller. There is no benefit to informing employees prior to the closing of the sale! All the risk is borne by the seller.

The acquisition of a business is all about risk. Both the seller and buyer want minimal risk; minimizing personal risk is how we try to ensure our success. Any request will be viewed through the lens of “what are the risks to me if I honor this request?”

Is there any way for a buyer to meet employees prior to closing the sale of the business? My follow up question is how do you balance the seller’s risk to facilitate the buyer meeting employees?

There is an option, but I haven’t had a buyer agree.

Balancing the risk means the buyer and seller must share in the risk of an outcome. The process of buying/selling a business involves many steps: Letter of Intent, Due Diligence, securing funding (most likely involving financing), and negotiating a Definitive Purchase Agreement with Conditions to Close incorporating the contingencies to be satisfied to finalize the deal. Earnest money from the buyer becomes non-refundable after the Conditions to Close have been met, and then closing is scheduled.

At this stage, the buyer has a lot of money invested; their earnest money is non-refundable, all the costs of accountants, attorneys, and advisors have already been incurred, and financing fees have been paid.

The risks to buyer and seller are still not perfectly balanced because the buyer could still walk away, although at significant cost and legal jeopardy. But depending on the seller’s confidence level at this point, they could agree to introduce company employees to the buyer. Rarely have I seen this occur because the risk to the seller is still much higher than to the buyer.

Logically, everyone can understand the reason a buyer wants to meet employees before closing the sale, but the risks associated with loss of confidentiality are just too high for the seller.

I have seen buyers cancel Letters of Intent because the seller did not agree to introducing employees during due diligence prior to closing. Confronted with the reality of the risk to the business, I ask myself if they really had what it takes to be an entrepreneur in the first place. Buyers should understand and respect the risk to the seller, realizing it’s not appropriate to expect to meet employees. If there is some extenuating circumstance, that should be discussed at the beginning of the acquisition conversations. Ultimately, protecting the business for future success is in the best interest of both the buyer and seller.

Dave Driscoll is president of Metro Business Advisors, a mergers & acquisitions, valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at [email protected] or (314) 303-5600. www.MetroBusinessAdvisors.com