Small business owners often have strong bonds with their employees. While these bonds are generally a positive thing, there are situations in which they can be tested. One of those situations is the inevitable time when the owner sells the business. This article explains how key employees can kill the sale of a business, and the best way to avoid that potential disaster.

Why Do Key Employees Matter To A Small Business Sale?

Most small businesses have a handful of “key employees”. They are integral to the day-to-day operations. Or, they are responsible for a large percentage of the businesses income. These employees are developed over time. And have been entrusted with the success of the business slowly over the years. They take ownership of their jobs, and they take very little or no managing. So why should small business owners worry about key employees when they sell their business? Because the continued operation and success after the sale is usually dependent upon the buyer’s ability to retain those key employees.

Large businesses hardly ever have key employees.  They have a lot more employees and therefore a greater division of labor. Small businesses generally do not have the manpower or the resources to make that work. If a key employee departs from a small business before, during or after the sale, it adds obligations and risks to the buyer’s plate. Instead of purchasing a functioning, well oiled machine, they are now looking at a machine that needs new parts. This can devalue the business by a significant amount. Or, kill the sale altogether.

Two Factors That Make Key Employees So Essential

  1. Integral To Business Operation

Most small businesses rely on a handful of key employees to operate the business. While most employees are easy to replace, key employees are not. They are integral to the business operations and usually have special knowledge of the business. The more essential an employee is to the successful operation of the business, the greater the risk to the buyer. The buyer is relying on that employee for the continued successful operation of the business. Without their assistance the business could have significant disruption. Even failure.

  1. Strong Relationships With Customers

In a small business, a few key employees could be responsible for most or all of the businesses income. They have a tendency to develop strong relationships with their customers and pose a huge risk to a buyer. Customers can end up feeling more loyal to the employee than the business. If that employee leaves, they could take a significant portion of the businesses value with them. This could disrupt any sale or result in extreme financial hardship to the business or the buyer, even complete failure.

The Importance Of Non-Compete Agreements

If you are a small business owner and you have key employees, invest in a good non-compete/non-solicitation agreement. Key employees can ruin a business sale or even hold it hostage. Non-compete and non-solicitation agreements are insurance for business owners. They can be stand-alone agreements or part of an employment contract. Non-compete agreements protect against unfair competition. They prevent employees from leaving for a competitor or starting their own competing business. Non-solicitation agreements protect your customers and employees. They are intended to ensure that your employees don’t leave and take your customers or other employees with them.

If your employees don’t have non-compete/non-solicitation agreements in place when you are selling your business, it may be too late. A buyer will often require them as a condition of the sale. If the sale depends on key employees to sign a non-compete/non-solicitation agreement, that employee could completely ruin the sale. Non-compete/non-solicitation agreements are the insurance that small businesses need in order to ensure that a sale moves along smoothly. Without those agreements, there is a good chance the sale won’t happen!