Selling your business can be very tough.
There are questions to be answered, documentation that needs to be provided, brokers and attorneys involved – it can become very complicated very fast. In addition, all of your hard work is about to be exchanged for a substantial amount of someone else’s money, so emotions are likely to run high.
If you have never sold a business before, knowing what you’re in for can be very helpful in preparing yourself for this very stressful time. This is Part 2 of a series of articles that will address the elements of selling a business you may not have considered, but will shortly be confronted with. Part 2? They’re not your employees anymore…
Let’s start with a story. A woman who is in the process of selling her large restaurant employs both her daughter-in-law and a long-time employee as her managers. They both collect a substantial salary, but this salary and position are based solely on the loyalty of these two employees and not on their abilities or work ethic. In fact, the majority of the responsibilities that should be covered by these managers fall to the owner on a regular basis.
During the negotiation process, the seller emphasizes the importance of these two employees to the buyer in an effort to keep them employed post-sale, continually touting them as key employees when clearly they are not. She does the same thing to these two staff members, ensuring them that the new buyer knows how important they are to the business and assures them that they will be able to keep their jobs after the business changes hands. The seller also knows that the new owner will not play a key role in the day-to-day operations of the restaurant and will be relying on the management in place to keep the restaurant running.
In this transaction, the both parties have agreed to seller financing, meaning the seller will only get paid for her business if the doors stay open long enough for the buyer to pay back the note. In the weeks and months following closing, the business takes an extreme financial hit, as quality control goes out the window and regular responsibilities go unfulfilled. The buyer is forced to default on the note, so the seller ends up taking the restaurant back. Not only did she lose the potential payments from the buyer, the restaurant and it’s reputation are in ruin. She now has the choice to invest more capital and try to rebuild what has been lost to sell again, or close the doors for good.
Don’t be this seller! The seller of this business should have let reality prevail.
Many small businesses are family affairs, where an owner has stacked their staff with children, in-laws, and other extended members of their family. In other cases, a small business owner may have long-term employees that now feel like loyal members of the family. When the time comes to hand over the business to a new buyer, many sellers will try very hard to force the new owner to keep those staff members that the seller considers, for whatever reason, to be key employees. This thought is not driven by good business sense, but rather by a sense of loyalty to those employees.
In our example above, the seller did a big disservice to the buyer and to her business by pressing the new buyer to keep her managers in place. As a seller, you have to realize that the way you have run your business will probably be very different from the way a new buyer should run it in the future. The key employees in your business structure might be overpaid dead weight on the other side of the closing table.
Our seller also did her employees a disservice by assuring them that their jobs were safe. The truth of the matter is a new owner can and will employ (and fire) whomever they see fit.
If you are selling your business, you need to take a good look at the staff you have in place with an objective eye. Do they really bring as much to the business as you’ve been telling yourself they do, or are you driven by loyalty to keep them around? If the latter is true, don’t make the mistake of building up those employees to a new owner. Instead, let the buyer make those staffing decisions on their own. Your employees will either rise to the challenge of the new ownership, or they won’t stay employed. In reality, once the business is sold it is completely out of your hands.
Are you thinking of selling your business, but are concerned about the future of your most loyal employees? Please feel free to leave us a question or comment here, and we will be happy to address any concerns you may have.