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In the process of selling your business, it is important to consider your existing employees and how and when you will inform them of the sale. Employees contribute to the company’s culture, its values, and its processes; and their expertise can prove instrumental in ensuring the business continues operating efficiently. Here are some tips for disclosing the news while retaining key employees, bridging the gap between old and new ownership, and facilitating a smooth transition.

• Consider the Size of Your Company
  The size of your company can affect whether you employ a strategy to disclose prior to or after the sale. Despite the risks and benefits of either strategy, transparency is optimal to prevent employees learning about the sale from third parties.
  
  If your staff is large, then waiting until after the sale may achieve the best result. In this case, disclose early information about the sale only to those employees that will play a significant role in the sale process, such as the controller or CFO. These employees should sign a non-disclosure agreement to ensure information is kept confidential.
  
  If your staff is small, then letting employees know prior to the sale may prove beneficial. Early disclosure to staff provides early awareness and an opportunity for mental preparation. This fosters a sense of transparency and trust, allowing employees to engage in the process and offer valuable input. Moreover, this provides the new buyer with ample time to meet with your key employees to ensure they remain onboard post-sale.
  
  
• Consider a Two-Tiered Approach
  In a two-tiered approach, you first tell your key employees about the sale, either individually or collectively, then disclose to lower-level employees. This additional preparation time provided to key employees allows them to formulate favorable responses to questions and concerns about the news of the sale from lower-level employees.
  
  
• Consider the Benefits of Post-Sale Disclosure
  If the sale prematurely dissolves, the decision to disclose post-sale avoids anxiety about job insecurity, which can result in unnecessary employee flight. Additionally, the ability of the business to manage its day-to-day operations remains intact, and damage to relationships with clients, customers, or employees is prevented. It also avoids the perception that your business is failing amongst customers, clients, and suppliers, which protects your ability to obtain extensions of credit. In addition, if competitors do learn of the sale, they may attempt to poach your employees and/or customers.
  
  
• Have a Team Meeting
  Team meetings allow the time for employees to understand the sale and ask any questions. Often, employees are apprehensive of job instability as a result of the sale, so it may be beneficial to invite the new owner(s) to the meeting to discuss their plans upon completion of the sale. It may be beneficial to structure the discussion by emphasizing the positive features the sale has for your employees. For example, a new buyer may invest heavily in the company, increase salaries, and make other improvements to the business. If you position the transition correctly, employees will view this as an opportunity rather than a threat. Moreover, it is optimal to take the time to assure employees that their jobs are secure. Your employees will be comforted by this information, and that aids the transition.
  
  
• Approach the Announcement with Compassion
  It is likely optimal to approach the announcement with the utmost compassion, recognizing the diverse emotional responses that each employee may have to the news. This will demonstrate an understanding of the feelings associated with this significant change. Encourage employees to continue their professional development and growth, emphasizing the ongoing opportunities for their careers at the company. Instill confidence in your employees by assuring them that the new owner will take care of their well-being, fostering stability within the company and enabling the pursuit of growth strategies.
  
  
• Consider Stay or Retention Bonuses
  Retention bonuses are paid to long-term and loyal employees that stayed with the business for the entire time that it took to grow and make it prosper, while stay bonuses are paid to employees who stay with the company until the closing date or some period in the future when the transition work is expected to be complete.
  
  Stay bonuses serve as powerful tools to incentivize key personnel to remain committed and engaged throughout the transition process and beyond. They help in retaining crucial talent during the sale and ensure the continuity of essential skills and knowledge for the buyer. They also provide motivation to actively contribute to a successful transition, and act as a strategic investment to preserve stability.
  
  Keep any bonuses realistic. If bonuses are too high, it can cause financial strain, unrealistic expectations, and potential morale issues. Disproportionate bonuses may lead to resentment among employees, create perceptions of unfairness, and pose challenges to long-term sustainability. A realistic bonus avoids disincentivizing employees that remain at the business.
  
  Typically, bonuses are negotiated between the buyer and the seller during a business sale. Most of the time, the seller fulfills existing or created bonus obligations agreed upon. Buyers may agree to take on some bonus obligations, recognizing the value of retaining key employees and aligning with strategic goals. Details of bonus payments should be specified in the sale agreement.

For guidance on managing employees during the process of selling your business, call us at 631-738-9100.

This past spring, the Federal Trade Commission (FTC) proposed a rule that would have banned non-compete agreements nationwide. However, this week, a federal court in Texas ruled that the FTC lacked statutory authority to implement the rule,[1] which was set to go into effect on Sept. 4, 2024.

Judge Ada Brown ruled not only that the FTC did not have the authority to impose such a ban, but also that the rule was arbitrary and capricious, in that there was insufficient evidence produced to support a complete ban on non-competes, rather than a targeting of solely those non-competes which could be considered “harmful.”

Non-competes are meant to prevent employees from leaving one company to join a competitor or start their own competing business. They are also a way for employers to protect their company’s important and private information. While the FTC asserted that non-competes are an “exploitive practice” that violate workers’ “fundamental freedom” to change jobs or start their own business, business owners argued that non-competes protect their confidential information that is essential to their continued operation.

The Texas court’s ruling applies nationwide, and the FTC is reportedly considering an appeal.

If you use non-compete agreements and you have questions on how this affects your
business, please contact Christine Malafi at 631-738-9100.

https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

https://www.wsj.com/us-news/law/judge-tosses-ftc-ban-on-noncompete-agreements-ae517b48

https://www.cnn.com/2024/08/20/business/us-judge-strikes-down-noncompete-agreements/index.html

[1] Ryan LLC, et. al. v. Federal Trade Commission, (USDC Northern District 8/20/2024).