Employee Risks

By Maurie Cashman

Employee risks are often mis-identified and under-managed. Identifying risk in business has been a theme I have been working with in the past couple of weeks. Last week we discussed Structural Financial Risk and a couple of weeks ago we talked about Five Ways to Reduce Business Risk but how can you reduce risk if you don’t properly identify the risks that exist?

We’re looking at some risks that are often hidden or overlooked by business owners – but are hugely important in an ownership transition. These forms of risk are often miscalculated, particularly given today’s economic environment. This week let’s look at an example of employee risks.

I have been on both sides of this issue at the same time. I certainly wish that someone would have given me the clear advice contained in the attached article. It could have saved myself and my employees a lot of pain and fear.

“You always have two choices: Your commitment versus your fear.”

— Sammy Davis Jr., American entertainer

While it’s common for businesses to describe their employees as valuable assets, it’s not really the employees — the flesh-and-blood individuals — that are the assets. Rather, it’s their abilities. When a talented, skilled worker leaves your company, you can’t replace her just by bringing in a warm body off the street. You need someone with equivalent abilities. The skill set of your company’s workers, more than the workers themselves, is an asset, and since abilities can’t be touched, it’s an intangible asset.

Your Employees Know

Do you understand your employees and employee risk? I’ll let you in on a little secret – they are smarter than you give them credit for. If you are 50 or older, your employees are beginning to look at you and wonder when the big shoe is going to drop. Your employees know that it is inevitable that some change in ownership is coming. And they are weighing whether that is sooner or later and how that might impact them as employees. The same can probably be said about your customers and suppliers.

A key employee risk is that you can be certain that your employees are talking internally about this and those that interact with customers and suppliers are exchanging speculation, which quickly can become facts. The more transparent you can be that you have a plan in place the more your employees will feel comfortable that they are a part of that plan. You don’t need to give them details, just let them know that there is a plan for an orderly transition and a plan for what happens if you get hit by the bus. And remember, they may not like your spouse!

Retaining Your Key Asset

A second employee risk revolves around how to retain your employees. Don’t shortchange on this. If you do not have employee agreements in place that include non-compete agreements with at least your key employees, you are putting your business in tremendous jeopardy. Think about this. Someone walks in and offers you more money than you ever thought you could get for your business. However, the key to the offer is that the employees MUST stay with the business. You have no employment or non-competition agreements in place. Employee risk? I’d say so!

So the employees get wind of this and decide that they are unsure that they like this buyer. In fact they have been in mortal combat with the buyer for twenty years in the marketplace. Once they figure out that the only way the deal will close is if they sign agreements that they have never have before what do you suppose could happen? They might simply refuse. They might offer to buy the company from you at a reduced price or walk. They might try to extract compensation in exchange for signing the agreements, allowing you to close. But your employees are totally loyal and would never do this, right? If you answered that affirmatively then you have employee risk.

Ownership Transition Options

If you are a relatively small business (let’s say 15 employees or less) and those employees have grown up with you in the business – you may have a problem. Are these folks all getting ready to hit the door at the same time as you? If so, who is going to be left to run the business for your successor, who likely knows little about the business and certainly doesn’t know your customers or suppliers? How long will it take you to find, hire, train and prove that you have an employee base that can function on its own and under new ownership?

What if you are planning to sell to your children or employees? You are likely to have to carry some financing (maybe all financing) that would allow them to purchase the business over time. How much employee risk are you willing to shoulder via providing them financing and trusting that they will run the business successfully and pay off your note?

What is the most important asset of your business? That’s right.