Employees - first culture often leads to higher business valuations

If you’ve ever worked for a company that underwent an acquisition (or merger), you know it’s usually a powder keg of rumours and uncertainty.  Employees worry about job stability and what the new company culture will look like.  As a result, one of the major challenges during any business acquisition process is retaining employees. 

And retaining employees is far more important to the sale of your business than most people might think.  In fact, early in my career as a business broker, I expected that most business owners’ top priority would be getting the best price for their business.  I was wrong.  A lot of business owners have their employees and customers top of mind in the whole process.  They want them treated fairly and taken care of.  It shouldn’t be surprising really. Most business owners feel like their employees are part of the family and employees often feel the same way.  It’s that kind of employees-first culture that leads to better valuations when it comes time to sell. 

How employees contribute to your business valuation

The process of selling your business begins with a valuation – establishing and justifying the value of your company for potential buyers.  You might expect the valuation to be a combination of things like profit margins, predictable earnings, and future market demand for your products or services.  You’d be right.  But, your educated, well trained, and experienced staff are also an important part of that valuation formula. 

Employees are a vital part of your business success.  The personal goodwill that contributes to a good price for your business extends beyond you as the owner – and includes your employees.  Savvy buyers understand that part of what they’re paying for is the experience and value your employees bring.  Good people who are well trained and good at their jobs are valuable to you, and to the potential buyer.  They offer:

  • Experience with company processes and history
  • No learning curve or training which would be required for new employees
  • Understanding of the industry and your competitors
  • Working, successful, customer and supplier relationships

How to retain your employees and the valuation

If rumours of an acquisition cause employees to run to the door, they’ll take part of the valuation with them.  As a business owner, you probably want to continue to offer good jobs to good people and don’t want to see anyone leave.  At the same time, you want to retain the valuation that is in part a reflection of those employees. 

  • Identify key employees early so you can work with the new owner to establish a retention strategy.  Key employees are the ones who add the kind of value that is hard or almost impossible to replace.  They might be senior management or people in pivotal or unique roles. 
  • The use of stay on bonuses or other financial compensation are not unheard of as a way to both recognize the value of the employees and reward their past and future loyalty and service.
  • Consider additional training or development.  If employees are concerned about their job stability, consider finding opportunities for them to expand their skills through training or mentoring.  This makes them more valuable to the company today and down the road or gives them additional skills to add to a resume should they leave the company. 
  • Have a plan B.  If you are unsuccessful in retaining key employees, what can you do to make up the difference?  Can others be mentored into those roles?  Can you start the hiring and training process before you leave? 
  • Communicate to your team often.  The more you keep them in the loop, the more likely they are to feel like they still belong with the company, even under new ownership.
  • Communicate to each employee one-on-one.  If possible, sit down with each employee and talk about the future, answer their questions, and address their concerns.  This might be part of an annual review or assessment where they can communicate their career goals which can be shared with the new management. 

Getting yourself ready

Here are a few questions to ask yourself at the early stages of the selling process.  They’ll help you prepare for the tough questions from employees. 

  • How can we maintain confidentiality when necessary?  What are the processes and standards you’ll be asking your employees to uphold?
  • Who will represent your employees during this process?  Will they need or want a dedicated point of contact or go-to person?
  • How will the acquisition deal benefit the employees?  By asking yourself this early on, you’ll be in a better position to effectively communicate it to your team. 
  • What will happen under the new ownership?  While you might not have this answer yet, your employees will expect you to answer it as soon as you can.  Work with the new owners to deliver this message as soon as possible. 

Where to start

Step one is to establish your business valuation well in advance.  Sometimes as much as 3-5 years before the actual sale.  Then, you can begin to understand the role your employees play in that valuation and start to establish a firm strategy of retention.  We can help you get started.  Contact us to talk about what those early steps look like and the role a business broker can play.