TRANSITION TALK

Considering Key Staff During the Sale of Your Business

Posted by FP Transitions on Jul 30, 2020 1:25:00 PM

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It’s hard to keep secrets in a small office. The rooms are tight, the walls are thin, and it’s just a matter of time before everyone knows everyone else’s business. Even when an owner has quietly decided to sell their practice, they should assume that staff members will eventually find out (if they haven’t already). In our experience, it’s best that employees hear the news from someone they trust: the owner.

Prospective sellers are often reluctant to speak to staff members about their exit plans because they aren’t sure how the selling process will pan out and they don’t know how the staff will feel about the change. While it’s important to be sure of your decision before announcing your plan, looping your staff into the process can increase your success and can even help shape the structure of your sale.

If staff members want to work for the new owner, make that preference part of the listing and sale process. In this case, your best-match buyer criteria should prioritize employee retention. Though many buyers are interested in retaining current team members to help ensure a smooth transition for the acquired clients, they need to know that staff retention is part of the deal in order to address this issue during the due diligence phase.

Employment Agreements

Most third-party transactions are asset sales (versus stock sales), and employment agreements entered into prior to the sale–whether for licensed advisors or other staff members–are typically not transferable. Instead, the buyer will negotiate new employment agreements and compensation formulas that best fit their business model. An important tip is to use accurate benchmarking data to ensure that the compensation paid to a key staff member is reasonable and customary. For example, the seller may choose to compensate a special staff member with a higher-than-average salary, but the buyer may not.

Licensed Advisors

Licensed advisors require further discussion and thought. Depending on their status (W-2 employee, shareholder, or 1099 contractor) and how they are compensated (salary, bonus, or profit-sharing), licensed advisors can help the sale or hinder the process all together.

If a licensed advisor is compensated through a revenue-sharing arrangement or an eat-what-you-kill compensation structure, it can affect the value and sales price of the business. As a seller, you should be careful not to include any revenue that can be claimed by another advisor in the valuation process. The best way to avoid this is to sort these issues out in the years before the exit plan is implemented.

Staff Participation in the Buyer Search

Sometimes sellers want their staff members and licensed associates to participate in the due diligence process—even helping interview the prospective buyer candidates. Consider this strategy carefully. While your team’s opinion may provide valuable insight as you assess prospective buyers, non-equity partners should not have veto power, as the goals of a staff member often vary from that of a retiring owner. Selecting the right buyer should be a decision reserved for ownership–those who are in the best position to know all the facts, assess the opportunities, and weigh the risk factors.

Involving key staff members in the sale your business–to any degree–is an important part of the process. It helps you develop your buyer-search criteria, articulates your value proposition, and offers additional perspective. Most of all, it preserves the trust of the team you’ve built and ensures their support during the process–whether they remain post-closing or not.

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This article is based on an excerpt from our book, Buying, Selling, and Valuing Financial Practices–the FP Transitions M&A Guide. Explore additional excerpts or purchase the book here.

Topics: Selling Your Practice, Deal Structure, Buying & Selling, Building Your Team, "Buying, Selling, and Valuing Financial Practices"

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