When Should Employees Be Informed That Their Company Is Being Acquired?
Please note that I do not have any M&A deals underway at this time. I have, over the years, frequently encountered this type of communications challenge.
There are many factors that come into play when deciding on what is the appropriate time to inform startup employees that their company – their magic carpet ride – is in M&A discussions or that a sale has been done.
There is no standard approach or timetable for these communications. Typically the Board of Directors makes the decision, whether with the help of a Financial Advisor or not, to seek and evaluate strategic options or alternatives for the company. The CEO has the responsibility of executing that initiative with the help of his inner circle, such as his CFO and CTO, in order to address the myriad of due diligence questions and issues that will arise, which ultimately set the stage for an LOI including key terms, conditions, structure and valuation assessment by the buyer.
The CEO will, of course, first inform the Board of Director as soon as a term sheet or LOI is received. The CEO, again perhaps with a Financial Advisor, is principal interpreter of the terms, and major issues involved with respect to the M&A event, the process to close and possible post-transaction consequences.
I believe, however, the decision to communicate with employees should be made on the basis of “as soon as possible” but not until the deal is essentially a fait accompli – thus over most, if not all – of the due diligence hurtles that could derail the transaction.
Ultimately, it is the right and responsibility of the Board of Directors of the seller – which includes, many times, the company founders and extended investor group – to make the final decision to vote for or against the deal and subsequently, make the announcement to the employees. Until the escrow has closed and the buyer takes possession, the current board and CEO is impacted more so than the acquirer. The current CEO and Board are the decision-makers who are the most familiar with the employees, and who are key to an orderly transition and it is therefore their recommendations on how the “end game” should play out that is most appropriate and insightful. The timing and form of announcement to the employees is of paramount importance to initiating and ultimately executing a successful transition plan.
Many founders, CEOs and executive leadership teams (ELT) – especially if they are millennials – think it’s better to communicate the M&A opportunity and plan up-front with the company’s staff. The thinking, in sum, is: Better to be fully transparent than secretive and we have important things to say.
Experience shows that this approach, simply speaking, is not pragmatic and actually will prove to be the wrong course of action. Consider the following:
As the seller of your startup, you may go to market and not have any serious prospective buyers for several months. Many things can happen during this time and getting your staff worked-up over a possible ownership change is very premature and likely to be destructive given that you just started the process of selling.
M&A processes simply take time. As the seller, delivering the various items on the initial due diligence list and especially, engaging in negotiations with the potential buyer – as well as, sometimes, your own Board of Directors – don’t follow an exact schedule and they can be drawn-out for all kinds of reasons on both sides of the table.
Getting your staff fantasizing over pending wealth or worked-up about a change of control – with the various permutations, qualifications and calculations – is also problematic.
It's for these reasons that CEOs should consider breaking the news more broadly to employees later rather than sooner.
So, when’s the best time to announce the deal to employees?
I found that every deal is different, but CEOs should consider following this protocol:
Never publicly announce the deal until the wires are received by your bank and only after the following:
A thorough review the situation with your i-Banker (if you have one). Making sure the major deal terms are binding, rock solid with no loose ends.
Review the term sheet or LOI with your Board of Directors – include salient details and highlighting potential terms that could derail the process. Outline the planned course of events going forward. Answer one basic question: Is this the right deal for the company, for the customers, for the employees and for the stakeholders? Thereafter, review the situation with your ELT.
Consider taking any key employees outside the ELT into a confidential preview meeting about the acquisition. This is especially important if these key employees continuing employment are necessary for the M&A to close.
Just remember, a deal can fall through at any time – especially in the opening stages – so limit the chance of unnecessary stress on your people.
Employees have a set of concerns which are associated with being acquired, including:
“Am I going to lose my job?”
“Will I continue to report to my current boss?”
“Will the new company provide me with the tools / budget I need to do my job?”
“Will the new company give me interesting software problems to solve?”
“Will I inherit a crushing sales quota just so that the acquisition can be accretive? “
“Does the acquiring company have an open, agreeable culture?”
“Are there any terms in the M&A deal that will impact me directly?”
“Will my comp package and/or benefits change?”
Fortunately, smart acquirers know that employees of acquired companies have these questions and making immediate or across-the-board changes to a healthy business is the worst thing they can do. As a general rule, acquirors secure the business they acquired over the first year, sometimes longer. So at least for the first year, acquirers will want the same people who helped build a successful business to stay on and continue doing a good job at their previous or enhanced compensation levels and with the same managers.