Involving Management in the Transaction Process: The Circle of Trust
Owners always ask the following question when considering the sale of their company: “When do I inform my employees?” It is an interesting conundrum. After all, the owner cannot complete the transaction without valuable input from their management team including the Chief Financial Officer or controller, sales and marketing executive, and the Chief Operating Officer.
Informing the team members of the owner’s thinking necessitates bringing them into the owner’s confidence. When doing so, timing is everything. Bring them into the fold too early, and the owner seeks needlessly distracting key leaders. Bring them into the fold too late, and they may inadvertently learn about the transaction and feel betrayed that the owner did not confide in them. The latter can result in strained relationships between the owner and management — even sabotage the deal. It is a delicate dance, but with careful planning and forethought, the owner can optimize the timing.
So, what is an owner to do? For starters, before bringing management into their confidence, the owner should be confident that their objectives, however defined, can be achieved through a transaction. In addition, in the case of a negotiated sale with one buyer or a sale process with multiple buyer candidates, the owner should be confident that: i) the prospective buyers’ interest is legitimate, ii) they are willing to pay a market price for the company, and iii) they have the resources available to purchase the company.
Once the owner has addressed the foregoing items, the next decision is which members of the team to bring into their circle of trust. Determining who to bring into their confidence depends on the type of information the owner needs the provide to prospective buyer(s) such as financial information, sales and marketing information, intellectual property, operations, etc. Carefully choosing which employees to bring into their confidence is crucial since no owner wants an employee blabbering about the pending transaction at the water cooler. Having the news spread throughout the company before the owner is ready to disclose the pending transaction could have dire consequences including decreased employee productivity, employee defections, and the market learning about the transaction, among others, all of which could potentially impact the value of the company before the sale is complete.
It should also be noted that it is generally prudent for the owner to bring key employees into their confidence earlier rather than later particularly when requesting unusual information from them or when the owner hosts unfamiliar guests at the company in unusual numbers and at unusual times. It is important for the owner to acknowledge the sensitivity of the employees’ “antennae” to changes in routine and to notice something that is different. They will certainly wonder what is going on, will assume the worst, and will likely ask questions. There are so many “white lies” the owner can tell to keep a sale “under wraps” before tension and uncertainty envelopes the company.
Incenting key employees to assist in the transaction also plays an important role in whether they will be advocates or adversaries during the sale process. The roles they will be asked to play are tantamount to a “second job,” working nights and weekends to support the needs of the transaction. In other words, their incentives should align with their effort and role in consummating the transaction. In addition, their efforts to assist in the sale of the company may result in the loss of their job. Knowing that their efforts will be rewarded will make it easier to take on the second job and to comply with the extensive responsibilities associated with the transaction.
Ideally, owners should proactively incent their employees when they are hired. These incentives can take the form of i) a phantom stock grant, ii) a stock option grant, iii) a profits interest grant, iv) a sale bonus, or v) other means of compensation. However, owners who have not proactively granted incentives still have the opportunity to reward key employees for their hard work and dedication associated with the sale, typically in the form of a sale bonus. We will consider these options more closely in our next article.
Suffice it to say, no matter which employees the owner chooses to bring into their confidence first, it is nearly impossible to consummate a transaction without the assistance of the company’s management team. So, while bringing key employees into the owner’s confidence may be dicey, it is absolutely necessary to move the deal forward to a successful conclusion and to achieve the owner’s objectives.