🏴☠️ ⚡️ You MUST Manage Key Employee Risk in Micro SaaS Acquisitions (Acquisition Concept)
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TABLE OF CONTENTS:
What is Key Employee Risk?
Why This is a Common Scenario in Small, Bootstrapped SaaS Firms
Common Strategies and Tactics for Mitigating Key Employee Risk
Concluding Thoughts
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The vast majority of Micro SaaS firms are bootstrapped. This means a very lean team (3 to 5 people, few full-timers), wearing multiple hats, with not much by way of documentation (product, process, etc.). It’s common for a CEO / Seller to write code, manage support tickets, and conduct sales calls. They are the conductor and most of the orchestra.
The operators' tribal knowledge is trapped in their minds, and they touch everything, which obviously does not lend well to new faces stepping in to run the business.
The industry term for this is ‘Key Employee Risk,’ and it will undoubtedly be one of the top three risks to manage for any Micro SaaS acquisition.
So, let’s take a few minutes to define the term and lay out some general tactics for managing this all-too-common risk such that we all improve our chances of success…
What is Key Employee Risk?
The potential adverse impact on a company's performance, stability, and value due to the departure or loss of a crucial employee who holds significant knowledge, skills, relationships, or responsibilities that are not easily replaceable.
Why This is a Common Scenario in Small, Bootstrapped SaaS Firms
Founder-Driven Operations:
In small, bootstrapped SaaS firms, the founders or key employees often wear multiple hats, handling critical functions such as product development, sales, marketing, and customer support.
Their intimate knowledge of the product, market, and customer base makes them indispensable.
Limited Resources:
These firms typically operate with limited financial and human resources.
The inability to hire additional staff to delegate responsibilities concentrates essential tasks in the hands of a few key individuals.
Strong Personal Relationships:
Key employees, especially founders, often have strong personal relationships with customers and vendors.
The departure of such individuals can jeopardize these relationships, potentially leading to devastating customer churn.
Cultural Impact:
The culture of small SaaS firms is often shaped by the personalities and values of key employees.
Their departure can lead to cultural shifts that may affect employee morale and overall company performance, or worse, lead to a mass departure (aka ‘Flight Risk)
Knowledge Concentration:
Crucial business knowledge, such as proprietary technology, unique business processes, and strategic insights, is often concentrated in the hands of key employees.
Losing these employees can result in a significant knowledge gap that is hard to fill.
Common Strategies and Tactics for Mitigating Key Employee Risk
Seller Transition Period: A defined timeframe (we anchor around 3mths) during which the seller of a business, typically a key employee such as the founder or CEO, remains actively involved in the company post-acquisition. This period is designed to ensure a smooth and effective transition of responsibilities, knowledge, and relationships to the new owners and management team. The seller transition period often includes specific objectives and milestones to be achieved before the seller's departure. Here are the most important objectives during the period:
Bolstering Product and Support Documentation:
Ensuring comprehensive documentation of product features, functionalities, and support processes.
Creating detailed user guides, FAQs, and troubleshooting documents.
Establishing Documented Standard Operating Procedures (SOPs):
Formalizing SOPs for critical business processes such as customer onboarding, product updates, and customer support. We highly recommend screen recordings (via Loom or Vidyard), where you can then feed the transcript to an LLM to create a complementary step-by-step guide.
Ensuring SOPs are accessible and easily understandable by all team members. Notion is your best friend.
Transitioning Customer Relationships:
Introducing key customers to new points of contact within the company. Note: meeting customer face-to-face is TOTALLY worth the expense. You’ll secure relationships and learn a ton about the market you now serve.
Ensuring a seamless handover of customer accounts to maintain strong relationships. You want your PR hat on here so plan a multi-touch and highly human / personal communication campaign. The knee jerk reaction is for customers to have a NEGATIVE reaction to this news, they think you’ll gut the business like a cold-blooded capitalist. Reassure them. Reassure them again. Share plans and ask for feedback.
Stabilizing Operational Processes:
Identifying and addressing any operational bottlenecks or inefficiencies.
Implementing process improvements to ensure smooth business operations post-transition.
Benefits of an Extended Transition Agreement
Gradual handover of responsibilities to ensure smooth transitions.
Including the Seller in the New Business Entity via Small Equity Participation: At best, this is an amazing opportunity for the Seller to ‘take another bite of the apple’ (an apple that is their baby, perhaps their life’s work) and for you to utilize a VERY valuable perspective. At worst, this is an insurance policy to avoid catastrophic events (the seller knows where all the bodies are buried)
Offer an interesting slug of equity in the acquiring business (usually 3-5%) in exchange for a defined commitment (ie 10hrs of advisory per quarter).
Retention Bonuses for Other Staff Members
Implementing retention bonus plans for key staff.
Introducing performance-based incentives.
Concluding Thoughts
To conclude, Key Employee Risk is part of our game. That said, it’s well-defined and reasonable to manage. A seller transition period is table stakes for an acquisition, and it’s worthwhile to carefully craft what that transition plan looks like in terms of time commitment / accountability and the milestones you hope to achieve together. This should be a core part of your Asset Purchase Agreement. Lastly, I’d keep an open mind when it comes to including the Seller as an equity partner. Everyone wins.
Godspeed to those out there selling and acquiring Micro SaaS firms. I hope this was a useful exercise. We’re rooting for you all!
For the love of the game.
That’s a wrap!
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