Offering bonuses, incentive schemes or fund options to your people on the sale of your company quells uncertainty, reduceds churn and cuts the risks

When Stephen Morris sold marketing services business Haygarth in 2001, he took steps to ensure that the employees who had helped build the company had a share of the upside.

“We set up an employee benefit trust,” he says. “Our people are the business. What we didn’t want our employees to feel that the deal was benefiting only a few people at the top.”

But rewarding staff when a business changes hands is more than altruism, it’s a staff retention tool. And if you’re staying on as manager or have a stake in the ongoing performance through an equity stake or earn out deal, anything that cuts the churn of key players will help both you and the new owner. A reward scheme will at least encourage staff to think twice about leaving in the face of the inevitable degree of uncertainty that results from new ownership.

“Bonuses, incentive schemes or employee funds can be used to encourage staff to stay,” says Roger Byard, head of employment at law firm Cripps Harries Hall.

Uncertainty

Employee unease about a change of ownership is often justified, as takeovers are often followed by redundancies. In some cases job losses exceed all employee expectations, especially when a company buys a competitor to take it out of the market or to gain control of key assets like technology, rather than run the business as a going concern.

Sellers should try to establish the intentions of an acquirer before selling, but employees also have protection under law. When the assets of a business are sold (as opposed to the share capital), employees are covered by the Transfer of Undertakings (Protection of Employment) regulations (TUPE). This ensures that the new owner takes on the obligations to staff that were in place previously. “Employees’ terms and conditions cannot be changed,” says Byard.

When share capital is sold, employees are also protected, because although ownership has changed, the corporate entity is the same. That’s not to say jobs are protected, but that employees enjoy the same statutory entitlements.

Revealing all

One dilemma facing owners is how much to tell staff. It’s likely that, as well as keeping shareholders and directors informed, you may also have to disclose your plans to key employees. But, as Andrew Daw, a director specialising in corporate finance at finance director provider the FD Centre, observes, telling even senior employees carries an element of risk.

“The more people you tell, the more chance there is of the information getting out to a wider group of people,” he says. For that reason, business owners tend towards communication on a need to know basis.

But there is a legal dilemma. “Under the TUPE regulations, affected staff should be told as soon as the sale process is put in train,” says Byard. In reality, this isn’t practical or desirable. Aggrieved employees can take legal action. “But this is only likely if they are very unhappy with the outcome,” adds Byard.

But you do have to bear your obligations to consult in mind and manage the risk accordingly. Which is where
we came in. Keeping staff on side improves performance, cuts churn and reduces the legal risks.