How Key Employees Factor into a Business Sale

One of the negotiations we get involved with as M&A advisors is retention of key employees. Nearly every private business in every industry has a few “indispensable” employees. Before taking a company to market, we work with clients to evaluate key-person dependence and develop strategies for retaining key employees. This article offers help in identifying key employees in your business.

On one hand, having key employees is a selling feature of a business. But, when critical responsibilities and proprietary knowledge are concentrated in a few key individuals, this represents a business risk to buyers who need these people to stay and be happy and productive. Business deals can grind to a halt over key employee retention if owners fail to plan for this part of the sale process.

An owner’s first instinct is often to downplay the importance of key employees, so as not to discourage prospective buyers. But denial is not a strategy. In today’s market you can expect buyers to investigate key employees and insist on their commitment to the company.  Ask these questions to identify your key employees, before going to market. Buyers will!

8 Questions to Help Identify Key Employees

1. Who are our top sales producers?
2. Who shoulders most of the workload around here?
3. Who designed our top-selling products?
4. Who own patents to important products?
5. Who would do the most damage if they left to join a competitor?
6. If we lost them today, who would be most difficult for us to replace?
7. If we lost them today, who would have the most impact on our top line and/or bottom line?
8. When I leave, who will replace me?

With your key people identified you can develop strategies to mitigate the company’s dependence on them and/or retain them, and decide how and when to involve them in the sale process. Your strategy may include stay bonuses.

It’s always better to have a well thought out exit strategy than to leave things to chance. It helps to work with an experienced M&A broker/advisor like Exit Strategies. Since 2002 we’ve helped well over a hundred sellers strategize and successfully navigate tricky ownership transfer issues like key employee retention.

To learn more or to discuss a potential business sale or acquisition need, give Al Statz a call at 707-781-8580.