The value of human capital in your exit strategy

Business owners overlook retention when selling the company

By Alan Mischler, CEO, EndGame Success
You have dedicated blood, sweat and tears and most of your professional life to building your business. And now you are contemplating a big payday by implementing your exit strategy.

Perhaps you sense that the market is right for an end game:

  • Your business is optimized; sales are strong
  • Or you are tired, ready to hand the reins to a new owner
  • Or you are ready to focus your efforts on something new

Let’s say for argument’s sake that you’ve decided to sell AND the timing seems right.
You begin the task of putting your company on the market.

  • The process may involve a business broker
  • And/or an investment banker

Preliminary marketing by those entities is typical. Investment bankers and business brokers let the marketplace and investment community know about your company’s potential availability for acquisition. They use a prospectus known as a Confidential Information Memorandum (CIM). Usually, the CIM does not contain “due diligence” information from a CPA, accounting firm or lawyer. Due diligence usually occurs when an interested buyer triggers research and investigation into the company’s financial condition and overall business health report card.

…One factor in particular is pivotal… the retention
of key employees during and after the sale.

Several critical factors determine whether the sale of your company will be successful (with success measured by your yardstick). However, one factor in particular is pivotal and is the very one that many business owners overlook or underestimate: the retention of key employees before, during and after the sale. This factor is often the first question asked by potential buyers.

As you built your business, most likely you recruited professional talent that now represents your firm’s core competency. Perhaps it’s your design talent; maybe its key people in the engineering group or high reputation producers in the sales organization. Maybe it’s just you. Without you (or a clone), the business might not function.

Key employees are those who remain vital to the company’s operation and growth. Indeed, truly successful business owners are those who have recognized the limits of their own expertise and bandwidth, and have judiciously hired key employees to allow the business to achieve the success it wouldn’t have realized otherwise.

And, a truly honest exit strategy will account for the owner’s role by cloning key functions into a retained leader, perhaps someone recruited specifically to take the reins from the owner.

Company size usually determines the need for key, executive-level roles. How many of these positions your company has filled is likely a function of the company’s growth, the nature of its business and your ability to delegate. These roles can encompass everything from sales, marketing, operations, business development, product development and finance.

The result of growth, however, is that key individuals become critical to the company’s ongoing success. Any potential buyer is going to recognize this and, absent solid incentives, will anticipate the loss of critical employees. After all, in small companies the likelihood of retention of non-equity employees declines when a loved and respected owner departs. But the Shakespeare rule might keep some of the best headcount on-board as the sale closes:

Shakespeare’s Hamlet said it best: [Man would] rather bear
those ills we have, than fly to others that we know not of…

Also problematic is that employees in upper management, having learned of your plans, may presume (often incorrectly) that they will be replaced by the acquiring firm. Now you’ve got key employees starting to shop around for another job. These realities represent a weakness in your company that will surface quickly in the exit strategy sales process

Approaches to Retention

Approaches to preempt this inherent weakness before a sale include those that best convey the worth of your key employees. Establishing recognition and a plan for rewards are two tactics always worth considering.
There should be a chapter in your exit strategy that implements a plan to bolster retention. Some examples of tactics include:

  • Multi-year phased retention bonuses
  • Salary plan adjustments for performance
  • Bonuses for the successful sale of the company when employees remain on-board
  • Stock options are another potential solution depending upon the type and ownership structure of your company
  • Non-financial motivators, such as promotion opportunities and/or career growth, paid leave and benefits structure, tuition reimbursement, childcare assistance, and even career counseling for spouses or partners, are also worth considering.

In my experience, addressing employee compensation and retention as part of a holistic, all-encompassing plan is best. This calls for a company-wide compensation plan which delineates a salary structure for all employees, and a defined benefits plan to include leave, bonus and other benefits.

On the individual level, you’ll want to define specific incentives for those employees you identify as absolutely key. You’ll seek to achieve the retention of those employees.

Of paramount importance, however, is to remain proactive, not reactive with whatever approach you elect. Conveying worth, recognition and rewards only after the word gets out that you are selling the company can look disingenuous. It may result in resentment that surfaces during a buyer’s due diligence.

Policies that recognize the contributions of employees in a way that reflects sincerity and appreciation, put into place well ahead of the end game, always go a long way toward creating loyalty. You are more likely to pass the retention test when it’s time to sell your company. Potential buyers will sense the atmosphere and gain a strong impression of business values, leading to your actual end game: complete success.

As CEO of EndGame Success, I’m available for a no-cost consultation about your exit strategy. And, I’m ready to answer questions and respond to comments about this and other articles. Click here to send an e-mail.

Contact me at to receive a free assessment of your key-employee retention strategy

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