Stop Timing Employee Disclosure—Fix Your Structural Dependency Instead

A business owner faces an impossible choice. Tell key employees about the planned sale too early, and they might quit before you have a committed buyer—destroying the deal entirely. Wait until after signing a Letter of Intent, and those same employees gain leverage that can force price reductions or kill the transaction.

This isn’t a problem with a clean solution. It’s a fundamental tension between confidentiality risk and retention risk. Business owners planning exits need to understand both sides of this tradeoff, not follow oversimplified advice that ignores half the equation.

Why Post-LOI Disclosure Creates Leverage Problems

The conventional approach—keeping the sale confidential until after an LOI is signed—does create a real problem. Once you’ve committed to 3.5-5 months of exclusivity (the median timeline from LOI to close per the 2024 Pepperdine Private Capital Markets Report), you’ve limited your options.

When you inform a critical employee at this stage, they recognize three facts: you need them to close the deal, the buyer needs them post-closing, and you’re operating under time pressure with sunk costs in legal fees and due diligence.

In businesses where specific employees control customer relationships or proprietary operational knowledge, this creates a negotiating imbalance. The employee can demand higher retention packages or, in the worst case, resign—forcing the buyer to reduce their offer or walk away entirely.

The risk is real but context-dependent. In professional services firms where client relationships are personal, or in technical businesses where specific knowledge is undocumented, key employee leverage can significantly impact deal terms. In asset-heavy businesses with documented processes, the impact is typically minimal.

Why Pre-LOI Disclosure Creates Different Risks

The alternative—informing key employees before engaging buyers—solves the leverage problem but creates three new ones:

Flight risk. When employees learn the business is being sold, some percentage will leave immediately. They may be concerned about job security under new ownership, uncomfortable with the uncertainty, or simply see it as a signal to explore other opportunities. Unlike post-LOI resignations (which affect deal terms), pre-LOI departures can prevent the deal from happening at all.

Competitive disclosure. Employees who know about sale plans may inadvertently or deliberately share that information with customers, suppliers, or competitors. Once word spreads that a business is “in play,” customer relationships can deteriorate, competitors can poach talent, and deal value erodes before you ever receive an offer.

Ransom dynamics. Sophisticated employees who learn of sale plans 6-12 months in advance may demand retention packages as a condition of staying—even before you have a buyer or know what the business will sell for. This can lock you into expensive commitments that reduce your net proceeds.

The critical difference: post-LOI risks affect deal terms. Pre-LOI risks can kill the deal entirely.

What the Data Actually Shows

The Pepperdine Private Capital Markets Report tracks why middle-market deals fail. The top reasons are valuation gaps between buyer and seller expectations (49%) and lack of capital to finance the transaction (20%). Key employee issues are not listed among the top deal-killers.

This doesn’t mean employee retention is unimportant—it means that when deals fail due to employee problems, it’s typically because the business was already structurally dependent on specific individuals, not because of disclosure timing.

The real issue is key-person dependency itself. Businesses that cannot operate without specific employees face meaningful valuation discounts. While comprehensive data on key-person discounts is limited, practitioners commonly observe discounts in the 10-30% range, with the magnitude depending on the severity of dependency, industry characteristics, and buyer risk tolerance. This discount exists regardless of when you tell employees about the sale.

The Decision Framework You Actually Need

Rather than following a one-size-fits-all rule about disclosure timing, assess your specific situation:

Consider pre-LOI disclosure (3-6 months before engaging buyers) when ALL of these conditions apply:

• Timeline certainty is high: You have engaged advisors, completed financial preparation, and expect to receive offers within 4-6 months (not “thinking about selling someday”)
• Employee trust is high: These specific employees have handled confidential information appropriately in the past, such as financial data, strategic plans, or customer pricing
• Key-person dependency is documented: Your EBITDA would decline by more than 15% OR you would lose more than 25% of a major customer if this employee left (not just “they’re important”)
• Alignment is possible: You can structure retention as phantom equity or sale-price-linked bonuses that align incentives, not just time-based stay bonuses
• Backup plans exist: You have identified succession candidates and have at least partially documented processes, so you’re not starting from zero if they leave

Avoid pre-LOI disclosure when:

• Timeline is uncertain (might be 12-24 months before you actually engage buyers)
• Employees have flight risk or poor track record with confidential information
• Your business is NOT significantly key-person dependent (no discount to avoid)
• You can fix structural dependencies through process documentation in 12-18 months
• Market conditions favor selling soon (waiting 6-12 months to address retention could mean missing the window)

The highest-value strategy is often neither pre-LOI nor post-LOI disclosure—it’s eliminating key-person dependency structurally:

1. Document all critical processes in writing
2. Cross-train employees so knowledge isn’t concentrated
3. Build customer relationships at the company level through CRM systems and team-based account management
4. Create management depth through clear roles and decision-making authority

This takes 18-24 months but eliminates the 10-30% key-person discount entirely—a far larger value impact than optimizing disclosure timing.

What To Do in the Next 90 Days

If you’re planning an exit in 18-24 months, here’s the realistic sequence:

Weeks 1-4: Assess key-person dependency honestly. For each employee, ask: “If this person resigned tomorrow, would our EBITDA decline by more than 10% or would we lose more than 20% of a major customer?” If the answer is yes for more than 2-3 people, you have a structural problem that affects valuation regardless of disclosure timing.

Weeks 5-12: Determine if dependency can be fixed structurally. Can you document their knowledge? Cross-train others? Transition customer relationships to multiple team members? If yes, this is almost always more valuable than retention agreements. If no, retention planning becomes necessary.

Weeks 13-16: Stress-test enforceability and costs. Consult legal counsel on non-compete enforceability in your jurisdiction. Model retention package costs (typically 6-12 months salary per critical employee). Calculate whether the retention investment is justified by the discount you’re avoiding.

Month 4+: Make the disclosure timing decision based on your specific situation. There is no universal right answer. The decision depends on employee trustworthiness, timeline certainty, severity of key-person dependency, and your ability to fix it structurally.

How This Plays Out in Practice

Consider a professional services firm with $1M in EBITDA where the VP of Client Services managed relationships representing 35% of revenue. The owner assessed:

• Timeline certainty: Medium (12-18 months, not imminent) ❌
• Employee trust: High (10-year track record, demonstrated discretion) ✓
• Key-person dependency: Severe (35% revenue concentration) ✓
• Structural fix feasible: Yes (could transition to team-based model over 18 months) ✓

Decision: Prioritize structural fix over disclosure timing optimization.

Actions taken: Implemented CRM to document client interactions, paired VP with junior team members on calls, moved relationships from personal to firm-level, built succession candidate.

Result: Sold 20 months later at 6.2x EBITDA (no key-person discount) versus projected 4.5x if dependency had remained. Investment of $80K + 200 hours owner time created approximately $1.7M additional value. The disclosure timing question became largely irrelevant because the underlying dependency was eliminated.

The Uncomfortable Truth

Most business owners want a clear rule: “Tell employees X months before the sale.” But the evidence doesn’t support a universal prescription.

The businesses that achieve the highest valuations aren’t the ones that optimize disclosure timing—they’re the ones that build valuable, transferable operations that don’t depend on specific individuals. When a buyer can see documented processes, cross-trained teams, and company-level customer relationships, the question of when you told employees becomes largely irrelevant.

If your business is genuinely key-person dependent and you cannot fix that structurally before your planned exit, then yes, you face a difficult choice about disclosure timing. But recognize it for what it is: choosing between different risks, not following a proven formula.

The $750,000 mistake isn’t waiting too long to tell employees. It’s building a business that depends on them in the first place.