Employee Acquisition of the Laboratory

If the laboratory owner is considering a long-time key employee for the acquisition of the whole or a part of the laboratory, the vetting process is certainly less intensive than that of a purchaser who may not be known prior to the inquiry for the acquisition. It is probable that since the employee has been with the laboratory for a long time, there are few secrets about this person from a business perspective and perhaps also from a personal standpoint. The owner understands the employee's work ethic, dedication, and job skills.

It may not be clear whether the key person understands the administrative process that occurs at the laboratory on an everyday basis. Decisions about suppliers, accounting, legal, etc, may be areas where the potential new owner needs tutoring. This is not such a bad thing since the best mentor is most likely the seller. He or she can assist the buyer with advice about how to resolve issues with suppliers and to make the introductions to the administrative team at the laboratory. The relationship with some of the clientele is also a given.

One of the biggest negatives of an employee buyout may also be one the most important positives—the relationship with the other employees. If another employee was interested in acquiring the laboratory and was denied the right to buy it or couldn't arrange the appropriate financing for the acquisition, that employee may hold a grudge. They may not want to work with the potential new owner because of it.

This relationship, if sour, may cause a problem with employee morale. It can also be transparent to the customer base. The customers don't want to hear about the goings-on of the employees. Customers as well may have some trepidation in working with someone who was overruled by the former owner and who now is the boss. The new owner who was the former employee is now the one who sets price guidelines, delivery dates, and everything else that may be important to the customer.

There may also be a disconnect with an employee who was once "one of the guys" but is now in charge and must be able to give orders and have them fulfilled. A former employee who is now in an ownership position soon learns that relationships change. The new owner wants the respect of the employees but friendships can be difficult to maintain when a former employee becomes the owner.

Key employees who become owners can reintroduce ideas that may have been vetoed in the past. These may be in the form of changes to customer service, pricing, or product lines. A former key employee is probably one who has been "in the trenches" more than his or her boss and understands the customer better from the interaction process. Someone new in charge may be more interested in developing more product lines for additional profit and competitiveness. Calling on the customers and developing some new marketing strategies are also ways to increase revenues and create a better referral base with a more hands-on approach.

Sometimes the name of the laboratory includes the owner's name, so name recognition may be an important ingredient for the clientele. The seller may feel it is especially important that their family/brand name and laboratory reputation are continued. There are also critical tax considerations in selling the laboratory and an allocation to the name of the laboratory benefits the owner from a tax perspective in a positive manner. Buying the rights to the name also protects the buyer and limits the seller on a prospective basis.

In today's financial environment, supplying secondary financing may be imperative to closing the deal with the buying employee. If that is the approach necessary for the sale to occur, the owner who finances part or all of the transaction may want to stay on as a key employee for a while to assist with the transition. If secondary financing is being supplied, the conventional lender may want the former owner to stay involved as well. This helps with the segue to the new ownership by the former key employee.

There are innumerable ways to transition one's business to another owner. Selling a laboratory to a key employee has its own unique set of challenges for both seller and buyer. Being aware of these challenges is the first critical step in this process.

Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.