On Pointe – 401(k) Edition
401k!?!? Why bother… I’m going to be selling my company anyway! 3 Reasons to consider 401(k) even when you’re selling…
I was enjoying a steak dinner with my new attorney friend in Denver. Tons to talk about but we had an interesting exchange… first some background.
We both were attending a conference that focused on cannabis and cannabidiol companies. This well-attended conference focused on consumables. What I like most about these conferences is there tends to be a real exchange of ideas and views, much deeper than media headlines…
Back to my friend… As an attorney, his business model centers on transactions. While cannabis/cannabidiol industries create legal challenges… often the transaction terms and legalese are like any deal in a mature industry.
My business model is somewhat more challenging. The 401(k) is more “relational” whereby once the “transaction” begins it often does not end there. There is a service model that needs to be applied.
While we both agreed on our different business models, we furthered our differences on 401(k).
His concern was this… why market 401(k) in an industry in which larger operators buy smaller operators? His concern is if your business requires a lengthy service model then you may be out of luck.
Not quite a confidence builder for me! But I’ve helped companies with 401(k) for many years so I’m used to certain objections.
Back to dinner… my new friend challenged me further and I was ready.
“Why will an operator bother with the time, energy, and expense of 401(k) when all they’re thinking about is selling? Who’s going to do this?”
Fair point and my initial counter was not everyone is selling for the “quick buck”.
But the answer to the question has more legs than that. What “if” a 401(k) plan can help facilitate a transaction? What ‘if” a 401(k) plan shows the appearance of a more “mature” operation with a retention program? My experience has shown me that those who are expecting to “cash out” often still want to start a retirement plan. But why?
So, I started to give him my 3 Reasons a company should consider a 401(k) plan even in the event of a potential sale. But I had a few questions of my own…
How do you maintain the toughest part of the transaction regarding the employees?
What can a business operator do to present a stronger picture of “value” for their business? (Hint, there are a lot of answers, and some might include the company’s benefits package).
How can you change the perception of being a “small inexperienced” business to one that is “buttoned-up”?
An acquirer has many potential problems when they go to purchase a business. Problems such as counting on the employees to stay. Or will they have to hire and re-educate these new hires?
The issue of employees, who are “assets” of the company and are one of the largest assets. How can you keep them around post-acquisition? Employee retention is an ongoing challenge for businesses whether they are engaged in an acquisition or not. Especially in Emerging Industries… they are trying to lure talent from more stable, mature industries.
Now throw in a transaction and employees get nervous. They are building up their resumes and getting them out to prospective employers.
Employees are the engine that drives growth now and tomorrow, so when a transaction occurs that growth may stall if they begin to leave. Ask any CFO or HR Executive about what is most cost-effective… keeping employees or going out to hire, then training new employees? My guess retention comes up often.
A good 401(k) plan with a proper vesting schedule can help slow the wave of employee exits, especially key employees.
What about business value? This reason is often harder to gauge when it comes to a retirement plan. However, the answers lie as part of my first and last questions to my attorney friend. Part of the “value” of the business is the employees. The other part of the “value” is confidence in purchasing a well-rounded business.
I’ve had clients whose companies were acquired, and part of the selling agreement was to get the 401(k) plan as well.
Often the 401(k) becomes part of the negotiations, without one you may lose a little leverage.
Sometimes, the larger entity does not have a plan, so they were to get one through the transaction.
The last point, a 401(k) plan can also generate “confidence” for the acquirer.
Yes, my first two points hint at this dynamic, but transactions run more smoothly when trust and confidence are established.
Clean financials, organized structure, and strong company cultures are some of the tenants of a transaction. All of this helps build confidence. Including the benefits package…
Yes, benefits and 401(k) are not the primary driver of value. But imagine going into a transaction without a real benefits package. What kind of signal does this send? Does it open your business to the question of, “What else did they skimp on?”
Not sure you want to sit at the settlement table with your potential buyer questioning your operations…
Whether we’re looking at employee retention, perception of value, or adding confidence to the deal, a 401(k) can help add in these areas.
A well-thought-out and designed 401(k) plan is one of the areas smart operators take time to develop. These business operators know it can help add value whether selling or not.
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