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Is One Key Employee Worth $500,000 When Selling Your Business?

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in The Business of Business Finance

I was having breakfast with a CFO of a very successful government contracting company the other day who shared a story that is instructive and insightful as you plan the sale of your business.

Two years ago, he was finalizing 10 weeks of deal making on a small ($4.5 million) acquisition.  About a week before the deal was scheduled to close, the recruiting manager left the company they wanted to purchase, making the acquiring owner nervous.  After much consideration the acquiring owner decided to proceed with the purchase, but knocked $500,000 off his offer.  Although pricing is under constant negotiation during the closing process, this act was a bit unusual and it destroyed the deal.  The sale never happened and the seller is still trying to recover from the personal disappointment and get his company back on track.

Here is the lesson:  There are critical employees in your business who have the ability to impact your sale and the value of your company.  Here are some guidelines to keep in mind while managing your company sale process:

1 - Keep the process confidential.  In fact, you should not market your company "for sale," but rather searching for "strategic opportunities."  Use an outside party to help with your company sale.  Remember, it is much less expensive to surprise your employees with news of a sale then having them surprise you.

2 - Design a retention package for key people that is consistent with your earn-out provisions.  You are likely to have some of your sale proceeds paid out months after the closing based on performance metrics.  These should be coordinated with a retention package with key employees that allows them to share in the upside by increasing the back-end payout to you.

3 - If certain employees are key to maximizing the value of your company at sale time. they are key even if you do not sell the company.  Make sure you have golden handcuffs to keep them motivated to continue to build value in your company.  A well designed plan should always benefit ownership.

There are many moving parts to manage during a business sale, and retaining key employees is one of those parts. Since employees a emotional human beings, they can be one of the most challenging and surprising parts.  Remember, surprises are seldom good news when selling your company.

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