When acquiring a business that has employees it is not uncommon for the new owner to face some serious morale and productivity problems.
- Employees who believe, for whatever reason, that they were not treated fairly in the sale of the business may resort to pilfering merchandise and inventory to obtain what they think they rightly deserve.
Feeling mistreated is a common occurrence in a service-oriented business. Employees, especially long-term employees, may believe that it was solely their hard work that allowed the previous owner to make a profit on the sale of the business.
If the previous owner does not share some of the profit he made when he sold the business you as the new owner may have serious morale problems that will manifest themselves in reduced productivity and numerous other manners.
I experienced a situation where the sale of a service business was consummated without the knowledge of any of the employees. One Monday morning the employees walked in to learn that there was new ownership and that they had a new boss. For the next few weeks productivity was down by 50% and it took almost three months before it was back up to the level it was before the employees found out that the business had been sold. A situation such as this is very disconcerting for all of the employees involved.
- An employee may feel that his loyalty was to the previous owner not the business or company itself. Hence, when the business is sold the employee may see it as an opportunity or impetus to seek new employment.
- An employee may believe that due to your lack of experience in the industry or markets of the business that you have just acquired that he has now become a “key” employee and that that justifies a major pay increase.
If the current owner will allow it, talk to the employees. Some sellers, and it is understandable why, will not let you speak to employees prior to the sale. However, if you cannot have access to any and all the employees you should at the very minimum have access to all of the key employees in order to try to determine how they will react to a change in ownership and to ensure that they will remain with the company after you acquire it.
The question of how and when to tell employees that the business is up for sale or has been sold is a very difficult one to answer. Every business and the current owners relationship with its employees is somewhat different and unique. As a general statement I believe that every owner of a business has a moral obligation to keep his employees advised of any issues that may have an affect on their employment, good, bad or indifferent. On the other hand I can understand an owners reluctance to tell the employees that the business has been listed for sale as statements such as that generally have a very negative impact on productivity and overall employee attitudes and in some cases employees will scramble to obtain new jobs. And if one considers that it could be months or years before a change of ownership actually takes place why burden the employees with unknown stress or place the company in jeopardy.
I believe that it is almost impossible to perform adequate due diligence if at a minimum the key employees, middle and senior management (if the business being considered has this structure) are not informed of a pending sale. I suggest, therefore, that if the employees or at least the aforementioned group of employees have not been made aware of the pending sale prior to the acceptance of the “Letter of Intent” then they must me made aware immediately after that point. If you are concerned about access to key employees so that you can properly determine if you should acquire the business you can make it part a condition of your Letter of Intent.
You do not have to enter into confrontation with the seller; all you have to do is to state that the Letter of Intent is subject to reaching acceptable employment contracts with key staff (actually naming the individuals is better). It is impossible for you to negotiate employment contracts with individuals if you do not have the ability or right to talk to them.
People fear the unknown and, therefore, the best way to mitigate the negative effects of the announcement that the business is being sold is to meet with the employees as a group as soon as possible. Introduce yourself by giving some background about who you are and your overall business experience. If anything within your background is specifically related or pertinent to the business you are acquiring highlight it. Inform the employees that the reason you are acquiring the company is that you see the overall potential, if this was not true why would you be acquiring it. Relate to the employees by telling them that you understand that a change in ownership could make them feel uneasy and very concerned about their future employment. Until you fully understand the business and its idiosyncrasies do not make any forward-looking statements with respect to growth or employment. Smile a lot and try to appear to be open and friendly. Be prepared to answer questions. The answer to any question can be "I don’t know yet".