Do You Really Want to Meet Employees Prior to Closing?

Many business intermediaries, like myself, have been through this many times. Should you tell your employees you are selling the company prior to the actual closing? The following is a well written scenario by Jeff McAdam co-founder of the Bridlebrook Group.

We have all been there before—you are cruising along with some great momentum, on the verge of putting a deal together, until suddenly the buyer thinks they should be allowed to meet and speak with employees prior to the closing. This can sometimes stop a deal in its tracks, but in my opinion, it never should. This article will focus on how to deal with this issue and cite a real life example to demonstrate why meeting employees ahead of time is a bad idea for both the seller and the buyer.

As intermediaries, we always look to protect our clients. When a buyer wants access to employees before closing, the risks to the seller are numerous and obvious (loss of confidentiality, disruption to the business, concerned employees, etc.). However, if these are the only arguments made when representing a seller, the buyer may not see the entire picture and perhaps even feel that some of their concerns are being validated. The key is to express to the buyer why it is not in their own interest to let the cat out of the bag prior to closing.

Now, there may be some exceptions, such as a key employee, manager or member of a bona fide executive management team (rare for a small business). Even in these instances, you will want to carefully consider the timing and nature of bringing others into the fold. Also, please note this advice pertains primarily to main street transactions and some at the low end of the lower middle market.

During a typical sell-side engagement (if there is such a thing), when a buyer suggests the notion of meeting with the employees prior to closing, my reply is rather straight-forward. While I do explain the reasons mentioned above that would be harmful to the seller, I also go on to explain why it could be harmful to the buyer after they buy the business. Specifically, if an announcement is made that the business is for sale a few weeks or so prior to the closing, you are in effect giving the employees a reason and a head start to find another job. I explain that most of these people do not have the slightest idea of what it means to buy or sell a small business and they may associate a negative connotation or at least some uncertainty with the sale. Those living paycheck-to-paycheck will undoubtedly be concerned. They have all seen the headlines about public company megamergers and the layoffs that will sometimes result. But they have no frame of reference for a small privately-held business transaction because it’s just that – private.

Chances are that the buyer had not considered these concepts and will want to know how to mitigate employee concern, even if an announcement is made after the closing. Now they are moving into the right mindset. I explain that the message is to be nothing but positive and reassuring; “rah-rah”, so to speak. The buyer will want to explain that nothing is to change and that they intend to keep everyone employed. Further, since there is usually a transition period with the seller, they will explain that their “beloved” boss is not going anywhere for a while and remaining with the business. So, while there may

be some initial shock from the employees, seeing the seller and buyer working together every day post-closing and seeing that nothing has changed from a job security or quality of working life perspective usually keeps the status quo. Before long, it’s business as usual. The unknown is what causes employees to look elsewhere, which is exactly what a buyer creates by exposing the truth early and then showing up at some point in the future to begin running the business.

The “case study” that I would like to share concerns a deal that I managed where the buyer was allowed to meet with employees prior to the closing. However, this was a transaction where I represented the buyer, not the seller. My firm does quite a bit of buy-side representation, which can be grueling at times. But that is a different article for a different day.

We were still a month or so out from the target closing date and my client wanted to meet with the employees. Naturally, I discussed the reasons why it may not be a good idea. However, despite my advice, this was something they really wanted to do and the seller did not object. The meeting seemed to go fine and everyone was happy. Subsequently, the deal dragged on for the all too familiar challenges that we face as intermediaries—hoops to jump through with the bank, negotiating the definitive agreement, and the seller and their CPA deciding they want to defer closing into the new year for tax purposes. But we eventually got the deal done and again, everyone was happy—or so we thought. Less than six weeks after the closing, one of the lead technicians left to work for a competitor. This is a specialized business and experienced people can be hard to find. My client learned that this was not something that was put into play after the fact, but that this person had looked for another once learning the business was being sold. Apparently, the grass was indeed greener for this individual, who I firmly believe would never have left had they not had some time to wonder what it would be like to work for a new owner. This did sting a bit for my client, especially as they were still getting acclimated to the new business. But luckily, it was not catastrophic and they have since rebounded. I can only imagine that others have not been as fortunate.

The point here is simple. Seller and buyer have aligned interests when it comes to this delicate matter. This is not mere rhetoric when we are protecting our sellers but good, practical advice that any buyer must also consider. Deals are always about balancing the risk with reward and in my experience, most buyers are not properly assessing their own risks when asking to meet with employees prior to closing.

Above Source:  International Business Brokers Association

Michael Levin, Chairman                                                                                                                                                                                                                 Allan Michael Group, Inc.