The current labor problem Boeing recently experienced (and seems to experience every time a contract comes up) got me thinking of employees and their value to a business, especially a small business.
I always tell business buyers the following story:
Russ started his company 22-years ago. After 17 years he sold it and stayed on with a five-year management contract. He was now leaving and wanted to buy three or four "small" businesses.
Why buy three or four businesses? Because three of the vice presidents at his old firm had approached him and asked if they could work for him when he found a new company. His plan was to make each of them a company president (they would make an investment in "their" company). He would be Chairman and run one business himself.
Interesting story, isn't it?
But the point is, what if you wanted to buy Russ's old company and were comparing it to another company in a similar industry, with similar sales and similar profits? If you only looked at the financial statements you would conclude the two companies have a comparable value. But isn't it riskier to buy a company where three of five department heads are ready to leave? Isn't that company worth less?
Five years ago I often had to force business buyers to even ask whether the rank and file employees would stay on after a purchase (there usually was concern about key employees). Even though employees are one of the top two factors when analyzing the non-financial factors of a business (along with customers) it was tough to get some buyers to take it seriously. The labor market was such that they felt rank and file employees were easily replaceable.
In today's labor market it's usually the first thing they want to talk about. How hard is it to find employees? Will the current ones stay?
While it seems that Boeing hasn't caught on, most small business owners have. One owner recently told me, "The key to the profits of this company is the crew of people we have." On the other side, a recent newspaper article had to do with [on strike] Boeing engineers going to Microsoft and other employers for more money, a more interesting job and those ever-popular stock options.
On April 3 I received an e-mail message from a company trying to sell me a training program so I could consult on the subject of employees. The first line of the message was, "Employee retention - it's this year's hottest topic and could be your organization's biggest expense."
It's not easy managing good employees. The better and more talented they are the more freedom they want. The small business owner, just like the manager in a larger company, has to allow for delegation, employee input and independence while at the same time providing direction.
In a way, the small business owner has a tougher job than a corporate manager. Key employees become "ingrained" and the success of the company may be dependent on them.
It's a juggling act to keep them all efficient and happy. Yet these are the kinds of people decisions and management decisions owners and buyers of small businesses have to deal with every day. It's especially important because different people have different styles and needs. With the shortage of competent employees it is trickier than ever, especially during a transition.
In a small business there is usually nobody one-step-down on the corporate ladder who is partially trained and can step in. Lose a key employee and it may not only take a while to find a replacement but may temporarily cripple the company.
Small businesses can't always offer the same compensation package as a large corporation (vacation, retirement, benefits, etc.) but they can offer more individual freedom and responsibility. (Dilbert isn't based on life in a small business.) To the person who doesn't want to be treated like a number, this means a lot. It also means a lot to the business owner.
The value of a small business is greatly influenced not just by the financial statements (profit and assets) but also by the non-financial factors such as employees, customers, competition, suppliers and more. In the year 2000, employees are more important than ever. Employment contracts are becoming more and more prevalent during the transition to a new owner.
A key employee not willing to stay with a new owner will at best change the structure of the deal and at worst kill the deal. A good team, ready and willing to stay, coupled with the enthusiasm a new owner brings can catapult the firm to the next level.