When an owner of a privately-held business is getting ready to sell, it is common to hear a concern voiced something like this: This type of concern is most prevalent with privately-held and family-owned business, although not exclusively. Clearly there is a paternalism exhibited in family-owned businesses that is not seen as much in the large public corporation. How can these concerns be addressed? How can the seller protect its employees after it no longer is in charge? The cartoon below illustrates that this concern is sometimes misplaced. Employees very often prefer a nice severance package or bonus in lieu of a guaranteed job. In the article below we will discuss this subject in more detail. One way a seller can protect its employees is to contractually require the buyer of the business to provide the protection that the seller wants. For example, the seller could insist on a provision in the acquisition agreement that the buyer will keep the plant and/or offices open for a stipulated period of time. While this may be the simplest way of achieving the objectives of the seller, there are several problems associated with it. Number one: How is this provision enforced? If the buyer agrees to keep the plant open for 5 years after closing, what happens if it decides to shut the plant down in year 2? A naked provision without some kind of enforceable remedy for a breach may be no more than window dressing. Secondly, there may be a steep price paid by the seller for this type of requirement. In many cases, potential buyers who would normally be willing to pay the highest price for the business (because of synergies that could be achieved in plant consolidation for example, or staff reductions) may do one of two things: 1. The potential buyer may not even look at the business if the seller insists on this condition, or 2. The potential buyer may reduce the price it is willing to offer to reflect the cost that this commitment will have on its operations. The seller in these situations needs to understand how much money it is leaving on the table by insisting on these protections, and then decide if there is a better way to protect its people and at the same time get a higher price for the business. Surprisingly, experience has shown that many employees in situations like this prefer a severance package instead of a guaranteed job with the new owner. As the cartoon on page one illustrates, “Please, fire me.” is a whisper that is often heard when the new buyer is contemplating what to do. If a fair severance package is in place for such employees, they will often be very happy with their situation and be very grateful to the seller for protecting them in this fashion, rather than just insisting that the plant or office stay open. So an alternative to a naked requirement to keep the plant and/or office open may be to adopt a severance plan that gives the buyer the flexibility to do what it wants with the facilities and the people after closing. The severance plan has a cost no doubt, and the seller will inevitably bear it, in one form or another. But this should be compared to the cost to the seller of requiring the buyer to keep everything open for a period of time and not fire or move anyone. Another variation on this theme that sellers have used is to adopt some form of bonus program for employees payable after a deal closes. Here again, the seller rewards its employees for their loyalty and years of hard work by giving them a cash bonus after the deal is done. The buyer retains the freedom to do what it wants after closing. Again, from the seller’s perspective, the cost of this type of program can be compared to the cost (i.e. a lower purchase price) of having the buyer agree to keep everyone employed and to keep the facilities open for a period of time. Bonus plans and severance polices like these also give the seller more flexibility in rewarding some individuals more than others. A requirement to keep the plant open for 5 years protects everyone the same. The most loyal and valued employees are protected, but so are employees that maybe have not been so loyal and are not as valued. Why protect everyone equally when a cash bonus or severance program can be more fine tuned to a seller’s desires? Our advice to sellers who want to protect their people: Be flexible. There are many ways to skin the cat. Don’t foreclose discussions with a potential buyer just because they may want to close down your plant or office. Don’t refuse to talk to a buyer who will not need your clerical staff. There are many ways to deal with your loyal and valued employees beyond simply requiring that the buyer keep the plant and office open. You never know. You might be surprised at how many of your people prefer a severance package or a bonus and couldn’t care less if they lose their job. You might be surprised at how thankful and grateful your employees are if you in treat them this way. And at the end of the day, you may also end up with more money in your pocket. |
