In Exit Strategies

Manufacturing business case - Scott Bushkie of Cornerstone Business Services

We’re working on getting a manufacturing business sold here in the upper Midwest. The owner has been part of the company for over 35 years and is looking to enjoy life a bit more. He plans to stay and help the new owners, but he wants to be on the shop floor, troubleshooting projects, quoting jobs, and doing the work that gives him energy.

We found an international buyer who fits the opportunity well. Their first hire will probably be a controller / CFO-type person to take over the HR, insurance, and financial reporting issues the seller no longer wants to deal with as it sucks the energy out of him.

We have a letter of intent (LOI) and everything seems to be on track, except for one big hurdle. The buyer wants to talk with key management, but the seller doesn’t want to disclose the sale to anyone. (He didn’t even tell his CPA until we had an LOI in hand.)

It’s always a challenge, deciding when and how to tell your employees. On one extreme, sellers share plans with their entire team right away, as soon as they decide to sell. On the other, sellers wait until the deal is complete and then convene a meeting to introduce everyone to their new owner/boss.

Every situation is unique, of course, but we’ve believe the best solution is usually somewhere in the middle. We’ve had good success when sellers involve a few key managers early in the sale process.

This comes with several advantages:

Access to information. When the owner is keeping the sale quiet, he or she becomes our only resource for critical business information. Usually this seller is also busy running the day-to-day business. In the current deal, that meant we often had to wait three or four days to get answers.

Not telling key leaders also means you need to make up stories when requesting information from your financial staff and other managers. They’re bound to get suspicious. Meanwhile, we’re still dealing with delays and missed opportunities.

Your manager is giving you answers to one question when they could be packaging information to advance the real goal: getting your company sold. That’s why we’re typically better off when we have a small, core team providing the necessary insight.

Stronger growth story. As part of the marketing process, we’re showing buyers the company’s future growth potential. That message comes across best when we can introduce a buyer to motivated, energized leaders who will share their own insights and wish lists for the company’s next stage.

Buyer confidence. I’ve certainly seen businesses sell when no one on the management team knew a thing. But I’ve also seen buyers walk away when they were denied a chance to interview key leaders. They start to wonder what you’re hiding and abandon the deal rather than take the risk.

Informing management comes with risks. People might see the sale as an opportune time to retire, getting out before things start to change. Others worry about job security and seek a new position rather than risk the unknown.

For owners who plan to retain some equity and stay involved after a sale, sharing those plans with managers can help to alleviate some concern. For others, incentive plans and stay bonuses can go a long way toward retaining staff.

In one scenario, the buyer may set up an incentive pool, offering equity or bonuses if the company hits certain benchmarks. In another, the seller may provide stay bonuses, awarding maybe 50 percent at time of sale and another 50 percent in a year or two. These carrots work to both the buyer’s and seller’s advantage.

But beyond the key employees, we typically advise sellers to wait until the sale is complete, or nearly so. We want to avoid triggering the kind of turnover that can occur when employees are worried about the future. Some sellers still want to tell the whole staff, particularly in tight-knit organizations where loyalties run deep.

At the end of the day, it is a big decision and there is no one right approach. But I will usually advocate for telling key managers and giving them an incentive to stay.

As for this current sale, I believe the seller will open up once the purchase agreement is in hand and has been vetted by his attorney. There will still be some risk, of course, but at some point you have to trust your advisors and trust the process.

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