Many people say that your employees are your business. As cliché as it may sound, it’s true. With strong employees, your business can reach new heights. With weak ones, its performance may suffer.
If you’re selling your business, prospective buyers will understandably want to know if your best employees will stay on. People certainly add value to a business, but can they be considered assets in the traditional sense? Let’s take a closer look.
Is a Valuable Employee a Business Asset?
Employees of your business aren’t technically assets, as your company doesn’t control them. Rather, important employees are part of what’s considered human capital — the economic value of your employees’ knowledge and skills.
Your company’s human capital may be intangible, but that doesn’t mean it isn’t important.
Let’s say you own a construction company, and one of your employees is an experienced engineer who can accurately plan and estimate construction costs. Their skillset is vital to the success of your business, so they would be considered a major part of your human capital.
It’s important to note that when it comes to human capital, not all labor is equal. Generally, the more advanced an employee’s knowledge and skillset are, the greater their value in human capital.
Your engineer’s knowledge makes them highly valuable to your company, but your front desk clerk has less specialized knowledge, so they may not contribute much in the way of human capital.
If you’re considering selling your business, you want to keep as much of your human capital as possible. After all, if you have an extensively trained and experienced manager who’s willing to stay on through the business transfer, they can be quite a valuable “human asset.”
Selling a Business with Valuable Employees
Great employees make your business more desirable to buyers, so keeping them on through the change in ownership is essential.
That said, you can’t force your employees to stick around. That’s why many business owners offer incentives to encourage employees to stay on, such as:
- Salary increases: If you pay your employees more, they’re more likely to stay (and will also likely be more productive)
- Stay bonuses: Stay bonuses are typically offered in increments (a certain percentage after six months, 12 months, etc.)
- Phantom stock agreements: These agreements let employees claim a share of business proceeds
- Other perks: Company cars, club memberships, and other perks may make employees more likely to stay put
Before the sale, you may be able to work out a contract requiring an employee to stay for a certain amount of time in exchange for bonuses, pay raises, or other benefits. Some business owners may also pursue an earn-out agreement, which gives the buyer some assurance of the business’s continued success.
With an earn-out agreement, the seller only receives a portion of the purchase price once the business has reached pre-set performance goals. Your business broker will help you put an earn-out agreement in place if you and the buyer are having trouble agreeing on a fair price for the business.
Thinking About Selling Your Business?
Your employees may not show up on your balance sheet or in your business valuation, but they’re nonetheless key to business success. Buyers may be willing to pay more if they see that one or more experienced employees will be staying with your business.
This factor can complicate a deal. Fortunately, the experienced team at Sunbelt can help you design a deal structure and find ways to encourage your best employees to stay on.
We work exclusively with small and medium-sized businesses and maintain a directory of active buyers who are eager to purchase your business. If you’re ready to sell, contact us today to talk to one of our brokers.