One question we are consistently confronted with, is the issue of how well current employees will transition in a business sale. “Surprisingly,” says Achim Neumann President, A Neumann & Associates, New Jersey, “the question is of great concern to both sides – the buyer and the seller – albeit from different perspectives”.
The buyer is typically concerned with losing key people – a very valid consideration. Ultimately, after closing a deal, the buyer has paid for the “good will” of the company, which includes the work performance of employees. There is a tendency on the buy side to attempt to secure employees, or at least key ones, by way of an employment agreement. Whereas this sounds tempting on the surface, buyers seldom consider the drawbacks. For example, if a particular employee has been considering a move to a different company, an employment agreement will undoubtedly tie the employee to the current company. However, in all likelihood, this employee will not perform at peak performance going forward. As a matter of fact, such employee might very well have to be terminated fairly soon by the new owner, at which point the employer (or new owner) will be facing the possibility of aborting the employment agreement while still remaining responsible for the remainder of the agreement period.
Sellers view employee retention from a different perspectives, namely, as a token of their appreciation for the many years worked. “Usually, sellers do not want to see employees terminated after the sale of the company” says Michael Gersten, Managing Director, Northern NJ / Southern NY State. “So they seek all kind of assurances that the employees will be kept on.” Of course, such assurances are not enforceable once a new owner has taken possession of the company.
Finally, prior to consummating the sale, there is the question of how to obtain employment agreements without breaching confidentiality. Typically, employees have worked for an extended period of time under the past owner, without any sort of agreement. For the past owner to approach the employees prior to closing on the business transfer with the request to put such agreement into place, will – at best – immediately raise questions on the employee side. Worse, it could lead to a renegotiation of the existing terms, setting completely aside, that such negotiations would be lead by the selling party whereas the buying party has to execute the agreement.
There are no specific statistics for employee retention in small to mid-sized business transfers, however, studies done several years back within our firm’s organization point to a very small percentage of employees actually leaving after a transaction. Viewed from a different perspective, all employees have personal financial obligations to be met in their lives and undermining such obligations by exiting an existing employment situation, does not make a lot of sense. Moreover, a new owner might very well bring in new perspective and provide a pathway for company growth and employee growth – a very welcome change from the previous (tired) owner!
“Nevertheless, our firm has incorporated various forms of employee retention programs into deal structures over the years, “ says Frank Arcoleo, Managing Director, Central Pennsylvania, “ and it has been a thorough success for both parties.”
We encourage both parties to consider a private consultation with our firm to strategically explore different alternatives to meet their objectives in human resource management.
A Neumann & Associates, LLC is a professional merger & acquisition and business brokerage firm with 30 years of experience in New Jersey, New York, Pennsylvania, Delaware and Maryland that assists business owners and buyers with the business transfer process in a completely confidential manner. The company is affiliated with BBN, with 450 offices and access to a national network of qualified buyers and sellers. For more information, please contact A Neumann & Associates at 732-872-6777.