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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.

As a corporate lawyer focused on complex M&A transactions, I’ve closed countless deals for corporations of all sizes and high-net-worth individuals. In my experience, here are the five most important things you need to know about disclosure schedules and their critical role in the process:

1. What are Disclosure Schedules?
A large part of an M&A agreement will consist of “representations and warranties,” i.e., “promises” that are being made on behalf of the parties. Disclosure schedules are an attachment to the M&A agreement which closely mirror the representations and warranties. In addition to providing an opportunity to correct existing facts that could otherwise result in breach of the agreement, they qualify statements to make exceptions that would otherwise clutter the main document.

2. Are There Different Types of Disclosures?
There are two main types of disclosures that can be made in the disclosure schedules. The first type is an “exception” to a representation. For example, let’s say a purchase agreement contains a warranty that the target entity has marketable title. However, the seller has knowledge of a claim that impairs the target entity’s marketable title. The seller would then describe the claim in the corresponding section of the disclosure schedule. By disclosing this “exception,” you avoid any breach of warranty issue.

The second type is a “listing” required by a representation. For example, an agreement requires you to list all real property associated with your company. In a corresponding section of the disclosure schedule, you would then list all real property associated with your company.

3. What is the Purpose of a Disclosure Schedule?
The disclosure schedules provide dual protection for both buyers and sellers. For sellers, the disclosure schedules shift risks to the buyer. For example, a seller could represent that the company does not have any outstanding tax liability “except” for all the tax liability represented on the disclosure schedule. Post-closing, this shifts the risk for all tax liability contained within that disclosure schedule to the buyer. For buyers, disclosure schedules advance due diligence by increasing the transparency that is difficult to detail in the main agreement. Also, they create the foundation for claims which may arise post-closing.

4. How Much Disclosure is Enough?
It can be difficult to determine the level of disclosure, but generally a seller should not be concerned about disclosing too much. Over-disclosing may cause additional work, but this level of transparency allows the seller to appropriately shift risk to the buyer, as the instances of breaching a representation or warranty is drastically reduced.

5. Is There Any Preparation Needed to Draft a Disclosure Schedule?

• Involve employees with the knowledge base to oversee the production of disclosure schedules which can streamline the process.
  
• Keep concise, accurate records leading up to the M&A transaction, with an accurate backup of those records.
  
• Retain accurate records of any employee claims or third-party claims.
  
• Record agreements with top customers or suppliers, including disputes.
  
• Organize records pertaining to insurance and benefits plans, if applicable.
  
• Collaborate early and consistently with counsel to articulate representations and warranties with specificity which assists with balancing the scales towards over-disclosure, to shift the risk.

For guidance, contact Vincent J. Costa at 631-738-9100 ext. 343. 
Thank you to Linda Reimann for her research and writing assistance.