If you want to get into a heated argument, put a dozen CEOs in a room and ask them if they should tell their employees that they’re preparing to sell their company. What you’ll find is that they quickly polarize into those who would tell their staff and those who would not. Each group will advance very strong arguments for their case but few will have thought through the longer term implications of their position on the sale value of their business.

Those who argue for not telling employees will argue that the possibility of a sale will create stress and uncertainly among employees resulting in a drop in productivity, a loss of key employees who decide to leave rather than face an uncertain future and the possibility of the news reaching competitors who will use the information to undermine the business. Those who argue for informing employees believe that the information will leak anyway and that it’s better to inform employees rather than let them imagine worse case scenarios.

When I’ve spoken with entrepreneurs who have sold businesses, I’ve been very interested to find out what they did pre-sale and what they would do differently if they had to do it again. In almost every situation where the information was kept from employees, the entrepreneurs regretted the decision. Employees who had worked diligently for the business felt betrayed for being left out of a critical decision which would materially effect their future. In some cases this had the result of undermining the sale process or in key employees leaving the business prior to the sale. Few entrepreneurs who told their employees had adverse outcomes.

My personal view is that the preparation process itself requires active support of key managers and employees. They are required to create the right foundation within the business so that the sale price can be optimized and they are most often needed to remain with the business so that the buyer is able to best operate the business after the sale. Basically you need your best people to support the process before and after the sale. So involving them in the sale process and providing incentives for them to assist you to prepare the business for sale and for being prepared to leave the business if required, or transition with the business if needed, is an essential part of selling a business. Key employees can be rewarded by being given shares, options or bonuses to assist in the preparation process. Those being made redundant can be compensated for their efforts up to the date of sale while those who are needed by the buyer can be given a bonus after some set period after the sale for staying with the buyer to assist the transition.

While competition is always an issue, businesses which are always open to the right offer can simply portray that position. That is, they are willing to sell out to a buyer who can best develop the business. This allows the current owner to position a future sale positively to customers and staff.

In my last post I talked about the responsibilities that board members have to a company both before and after insolvency occurs. The list below provides some practical precautions for prudent directors in financially distressed companies to keep in mind.

Below are some practical precautions that a prudent director of a financially distressed company should keep in mind.

Financial Monitoring

1. Maintain vigilance over the company’s financial situation.
2. Convene board meetings as often as necessary to discuss important issues affecting the financial health of the company and consider alternatives to a particular course of action.
3. Avoid actions that benefit one creditor over another.
4. Place limitations on the company’s ability to incur further debt if the corporation is slipping into the zone of insolvency or it is unable to pay its debts when due.

Corporate Formalities

1. Maintain company formalities including holding scheduled meetings and keeping good corporate minutes of all actions taken by the board including the discussion of alternative courses of action that were considered and the advice of outside experts.
2. Ensure that all minutes reflect the attendance and active participation of directors.

Governance

1. If the board is considering entering into a significant transaction, such as a sale of assets, incurring substantial debt, a financial restructuring or any other transaction that could pose a substantial risk to company assets, seek legal and financial advice from outside experts which will also demonstrate that the board is considering independent, objective advice.
2. Before entering into a significant transaction of the type described above, consider seeking the advice and/or consent of major creditors.
3. Continue to act in the best interests of the company as a whole without favoring one corporate constituency over another, particularly any action that favors equity holders over creditors such as dividends or redemptions of stock.
4. Be aware that any action that benefits insiders including officers and directors will be subject to closer scrutiny and could be viewed as a breach of fiduciary duty or avoided as preferential or fraudulent payments.
5. Avoid increasing executive compensation out of the ordinary course of business unless it can be supported by the circumstances; consider obtaining outside advice to validate any decision.