Imagine you want to sell your business to your key employees and you’re even willing to give them a steep discount off the market value. You want to acknowledge their years of loyal service, but you quickly realize their idea of the businesses value, even after the steep discount, is nowhere near the actual market value. What was meant to be a gracious moment quickly starts to unravel.
After some painful negotiations you realize an agreement is not feasible and taking the business to market is the only option. One problem, you never secured non-solicits with these key employees and they are now threatening to leave and take the largest clients with them. So much for all the years of goodwill and camaraderie – down the drain in a matter of weeks.
Non-solicits are just one of many areas that business owners fail to prepare for the day they will step away from the business. Ask most owners who have sold their business and a recap of the process is pretty consistent – they wish they had spent more time planning to maximize value.
More to come in future posts on the other areas of concern – this post is focused on non-solicits. While you can attempt to get both a non-compete and non-solicit, most advisors spend the majority of effort on non-solicits. While non-competes are hard to enforce, non-solicits are more easily defendable and buy you the time necessary to backfill key employees without your business being in jeopardy.
The easiest time to secure a non-solicit is at the time you hire a new employee. The terms are being set upfront and the consideration for signing such a document is the job itself. After someone is employed the ability to secure non-solicits becomes much more difficult. At this point, employees know too much and they will probably be seeking some sort of consideration, ie; bonus, increase in base salary, or company shares. Consideration could still be worth it if it protects your business asset from the jeopardy of these employees leaving and taking clients.
Our advice is to work with your attorney to implement a non-solicit program to maximize the value of your business, ensure a smooth transition to a new buyer and maintain the goodwill and camaraderie you have built with your employees. If done properly the sale of your business will never be hostage to key employees threatening to leave and take your clients in the process.
About Sun Acquisitions
Sun Acquisitions is a Chicago based mergers and acquisitions firm. We work with clients that are interested in the confidential sale, acquisition or valuation of privately held middle market and main street companies. Our professionals have significant experience and knowledge to thoroughly guide clients through each stage of the sale or acquisition process. Sun Acquisitions has successfully managed and handled engagement across all industries and is recognized as a leading M&A advisory firm in the Midwest.
If you are interested in buying or selling a business, contact us at (773)-243-1603 or email [email protected].