The prospect of participating in a successful M&A transaction is the dream of buyers and sellers alike.  Years of hard work and sweat equity have led to a moment that will allow the business to thrive with new ownership, and allowing existing owners to transition to a new venture. However, there are other people who have put in their share of hard work -- the company’s employees.

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When news becomes available that a business is transitioning to new ownership, it is crucial to ensure clear, directed communication to all employees. The feeling of uncertainty and fear of one’s future create a negative work environment. The sooner all details of the transition can be filtered through the company, the more positive the effect, even the valuation.

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Decisions, Decisions...

Negotiating a transaction can seem like an all-encompassing event. Deciding if, and when, to tell the employees of a company should be given as much care as any other phase -- it’s the due diligence of human capital. Ethics are a strong driver among owners of small to medium workforces, where relationships can be more personal and the impacts hit home. During a transition, the likelihood of staff turnover increases with the size of the employee base. Whatever the reason be, one needs to balance morality with risks to the future of the business:

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• Competitors - loyalty of the customer roster may come into questions once news of a transition spreads. Competitors have a keen sense of an opportunity to scoop up a new business without having to spend a dime in marketing -- they simply offer something Customers who have previously been loyal may switch to a competitor, particularly if the owner-to-be has presented a negative experience for the customer in the past.

• Employees Averse to Risk - who have concerns in regards to future employment, may look for other jobs;

• Information virality - news spreads quickly, especially in today’s digital stream of events. Informing your team, however small the circle, widens the likelihood the news will leak. If information is currency, it is best that a company’s competitors are not cashing in before the employees.

 

Divvy-Up

Probabilities are great on paper, theoretical outcomes for theoretical situations. However, those odds are real in the game of mergers and acquisitions. None more so than the odds of not informing even a single member of the team. One remedy is to divvy-up the staff in half. One group is comprised of members key to the transaction, such as Vice President and Director level managers. They are singularly-focused on maintaining the pace of the transaction so everyone can get back to business as usual. This team will probably have access to the buying team to ease the due diligence information transfer and ultimately remove any roadblocks. The other half, the yin to their yang, is a team of non-manager staff. This group of employees are focused on keeping the train running, and can likely benefit most from being updated on the details of the transaction once everything has been sorted and the deal closed. To mitigate the feelings of resentfulness for not being kept abreast, the current management team should have a complete transition plan ready to ease any short term confusion and worries.

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The reality of not telling the entire staff stems from a simple fact: many deals to not get to closing. Selling a business is a long complicated process that can be very unpredictable. The emotional swings of informing the company’s employees of a sale, then it falling apart, may send mixed signals and ultimately counterproductive. Additionally, the team may lose confidence in the owner’s stake and drive to lead the company -- or in the company itself. The ups and downs of the selling process, such as going through potential buyer after potential buyer, only serve to increase the risk of staff turnover and to decrease the odds of a transaction ever becoming successful.

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Dividends After the Close

Following the best practice of starting with a small, dedicated strike team of informed employees works all the way through the closing of a transaction. However, once over the finish line, the entire roster should participate in the rewards of the sale. In one way or another, through mental and physical sweat, the staff have all been instrumental in the rise of the company and its ability to be positioned for a prime sale. If nothing else, the financial compensation that comes with a transition period can serve as an ailment to the information overload one may feel upon news his or her company has been sold. Specifically:

• A norm amongst employees that are let go is their attractiveness to the company’s competitors. If any management was let go, it is imperative to balance monetary rewards with non-compete documentation to keep the future owner at ease that no intellectual property or clients are leaving along with the talent.

• A tiered earning schedule is another common practice for retained employees. It shows their willingness to stay on as part of the new venture and the company reciprocates with compensation in stock or cash.

 

A common preaching in business is that nothing is personal. However, a selling owner should tread as if they assume they can complete a sale and walk away with all the proceeds to his or herself. The circle tends to come around, and business partners are more connected than ever. Especially if a selling owner plans to start another company, or acquire one, that potential workforce needs to be filled with confidence that the new management values the people that make it tick.

 

The decision is not one to be taken lightly, and not one that can be easily fixed once made. Consider the safety of the transaction, the speed of diligence, and the outcome of a successful transition when determining a communication strategy. It is much easier to explain to an entire workforce that a sale has occurred but every detail is handled, no need to worry -- than it is to stumble through the process and risk losing the entire deal. Think, a year after a successful transaction most employees won’t remember much except a small meeting and a change of faces. But a year after a bumpy selling process, with rumors and misinformation afoot, there might not be any staff left to help reminisce. It's important to work with experienced mergers and acquisitions advisors that can help you sell your business the right way by mitigating transaction risks during the process.