Keeping Key Employees Through a Sale

Decide who the key people are

Start with a short, honest list. A key person is someone whose departure would cost the business customers, revenue or the ability to deliver. That is rarely the longest-serving employee, though it can be. It might be the estimator who knows how every job is priced, the lead technician with the certification a customer insists on, the office manager who holds the vendor and customer relationships, the chef, the dispatcher, the salesperson whose accounts follow her. Some owners find the list is two names. Some find it is eight.

Add what each one holds. Do they have a license or a credential the business depends on? Do they have a relationship with a major customer that does not run through you? Do they hold passwords, codes or knowledge that nobody else has? A buyer will ask these questions, and you will want the answers before they do.

Then be honest about the risk. Who has complained about pay in the last year? Who has been recruited by a competitor? Who has been waiting for a promotion or a raise that you kept deferring? A sale makes those problems larger, because people who are unhappy and uncertain tend to call the competitor that already approached them.

What the buyer is afraid of

The buyer's fear is simple. They pay for a business with a certain level of earnings, and they will earn that only if the people who produce it stay. Lenders feel the same way. In an acquisition loan, a bank looks at management depth as part of the risk, and a business that depends on one or two individuals who might walk is harder to finance.

You can see this in how buyers ask for time with staff. Many want to meet the key people before closing, sometimes before signing. Some will make employment agreements with them a condition of closing. The buyer wants to learn who will stay and on what terms, and the answer protects your price too, since a buyer who is comfortable with the team is less likely to ask for a reduction late in the process.

Our post on owner dependency covers the related question of how much of the business rests on you. The staff question is similar. The more the business runs on a bench of capable people, the more a buyer will pay and the fewer conditions come with the offer.

Money, and how to put it in writing

The most direct way to keep a key person is a stay bonus. It is a payment made to the employee if they remain through a set date, usually the closing and sometimes a period after, such as six months. It tells the person that their loyalty is noticed, and it gives them a reason to turn down a call from a competitor.

Who pays depends on the deal. Some owners fund the bonus from their own proceeds, which makes sense when the price is high and the person is critical. Some buyers agree to pay it, or to share it. Either way, the amount, the conditions, and the date go in a short written agreement signed before the announcement. A verbal promise made in the parking lot is the kind of promise that gets disputed a year later, and employees know it. Rules on these agreements vary by state, and your attorney confirms what applies, including how the payment is taxed.

Think about the size without turning it into a formula. A bonus that is a meaningful fraction of a year's pay gets attention. One that amounts to a gift card does not. It is more useful to ask the person what they care about. For some it is money. For others it is a title, a schedule, a reporting line, or a say in the next stage of the business. A good buyer will think about all of those.

Consider offering key employees a chance to talk to the buyer about their own role after closing, and what it would pay. The buyer's offer, in writing, matters more than anything you can promise on their behalf. You cannot guarantee a job you will not control. Be careful about saying you will, and do not suggest that raises or titles are coming unless the buyer has agreed.

Written restrictions are part of the same picture. Some key people already have a non-solicit or confidentiality agreement with you, and many do not. If a salesperson or a lead technician has nothing signed, a buyer will want something in place at closing so the person cannot leave and take customers along. Your attorney can draft it, and the employee should be given a fair reason to sign, which is usually the stay bonus or the new offer. Asking for a signature with nothing in return tends to go badly.

When and how the conversation happens

Telling staff too early is one of the common ways a sale goes wrong, and telling them too late is another. Our post on when to tell employees describes the usual timing, which is later than most owners expect and sooner than most owners want to.

For key people specifically, the conversation often happens after there is a signed letter of intent and a buyer who has met you. At that point, you can say the business is being sold, who the buyer is, and what the buyer intends to do. People can handle bad news. They have a harder time with silence, and with learning about it from a customer or a vendor.

Tell each person yourself, in person and in private, before the all hands announcement. Prepare what you will say. They will ask whether they still have a job, whether pay and benefits change, who they will report to, and whether the business is moving or closing. If you do not know an answer, say that and say when you will. A guess that turns out wrong costs you more than a pause.

Confidentiality should be part of the same talk. Ask each key person to keep the news within the group until the wider announcement, and tell them why. Some will agree and keep their word. A few will not, and you should plan on that possibility when you pick the order of conversations.

What changes for them at closing

In an asset sale, the buyer is a new employer. Strictly speaking, the old company ends the employment and the new company hires the people, which means new paperwork, a new W-2 employer, new onboarding, and decisions about accrued vacation and sick time. Some buyers honor those balances and some pay them out. In a stock sale, the employer stays the same and most of this disappears. Our overview of asset sales and stock sales explains the difference.

Benefits matter more than owners expect. Health insurance, retirement plans, and paid time off are part of why people stay. If the buyer's plan is thinner than yours, the person who loses a good benefit will notice. If you have a company retirement plan, the buyer and your advisors will decide whether it is ended or merged, and employees should hear about that clearly and early so nobody is caught off guard. Loan balances against the plan and unvested employer contributions are the details that tend to cause trouble, so ask your plan administrator what happens to each before the announcement.

Ask the buyer to meet staff in a relaxed setting during the transition, and give them time to do it. A walk around the shop or the office, a lunch, a first week where you introduce the buyer in person. People want to see who is taking over and to judge for themselves whether this person is serious and fair.

When someone says no

Some will. A key person may decide to leave when the news comes, whether or not you do everything right. Plan for it. Cross train a second person on the critical tasks, document how each job is done, and ask the buyer to talk with you early about the possibility so it does not feel like a surprise in the last week.

If someone gives notice during the sale, tell the buyer promptly. A buyer who learns of a departure from someone else will wonder what else was held back, and that doubt lingers. A buyer told the same day, with a plan to replace the person, usually takes it in stride.

If you want help working out who is key and what a retention plan could look like, Business Advisors of America can walk through it with you before any buyer is in the room.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.