Exit Strategy Planning: When to notify your Vendors, Customers & Employees that the company is being sold

Disclaimer: Consult legal professionals for legal advice. The information contained in this post is not legal advice, nor is it to be relied upon as such. Consult legal professionals for legal advice to ensure legal compliance.

Selling a business can be a complicated process involving a plethora of moving parts that have disparate agendas, from a landlord, to a franchisor (if applicable), to equipment financing companies, etc. Vendors, Employees and Customers are also critical parties to a purchase and sale transaction between a buyer and a business owner. The major question is when to inform these parties that the business is for sale or in the process of being sold, or already sold.

Employees:

Notifying employees can be a delicate task. Among the concerns that employees have when they discover that the business is being sold are concerns about retaining their job, having their hours adjusted, their roles being modified, wondering if they will like the new boss, etc. These all create uncertainty for human beings, so there is an inclination for employees to seek out certainty, which could involve looking for a similar job with a competitor. Having any employee leave for a competitor is unsettling prospect, given that employee turnover affects company productivity. It is also unsettling, because competitors may get an competitive advantage over your company when it comes to winning business from customers. Additionally, competitors could make public the fact that the business is for sale, which could have additional dire consequences.

With all this in mind, the majority of purchase and sale situations of businesses involve notifying the employees only after the sale is finalized and the buyer is ready for immediate takeover. This reduces the uncertainty and wondering employees may do, since the transition is immediate. However, sudden change isn’t always taken well by some people, so having the owner stay with the company during an initial transition phase helps calm employees’ nerves and helps the buyer. On a side note, it is important to remember that any employee benefits due to the employees such as a paid vacation time is the responsibility of the seller. The employees will be starting new employment tenure with the buyer, so they would not have any accrued benefits. However, for the employees’ sake it is best to keep the accrued benefits uninterrupted, which means crediting the buyer the liability of employee benefits owed for things such as paid vacation time owed that will not be taken by the employees or paid out by the company until after the ownership transition.

Vendors:

Notifying vendors can be simpler than notifying the company employees, however, there are still considerations to weigh. If a vendor discovers that a business for sale, it can have an adverse impact on service, pricing and terms. The vendor can elect to put the company on C.O.D. (Cash on Delivery) instead of Net payment terms. If this happens, it has an adverse effect on the company’s working capital and cash flow. Perhaps, the vendor will prioritize service and delivery to other customers instead of the company for sale, which could impact the company’s ability to service its own customers. Also, vendors are often in contact with the company’s competitors, so this means that word can quickly spread that the company is for sale, which can have negative effects on the business and the buyer. Given all of this, it is often the best to wait until the sale is complete to notify the vendors. A caveat to this is the buyer will need to be able to get a credit account with the vendors as soon as possible, and they will need more than normal amounts of working capital while they get set up.

Customers:

Notifying customers at the appropriate time is also important, as they can be the source that causes the sale of the business to become public knowledge. There are legal ramifications when it comes to the customers, including, but not limited to, any agreements signed with the customers are going to be valid with the business seller, so new agreements will need to be made with the buyer. Also, make sure to consider any warranties outstanding with customers. It is a good practice to ensure that customers’ concerns will be addressed upon the terms they are expecting. In most situations making the transition as smooth as possible involves notifying customers as soon as the transaction is finalized and the buyer is ready to take possession of the business.

For More information on how Just Elementary, Inc, can help you Exit Strategy Planning for your business contact our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com.  We are happy to discuss your situation with you and help you create a plan to maximize the value of your business when you are ready to sell.