When a company is sold, the buyer has a strong interest in the employees in times of shortage of specialists and experts. For this reason, buyers regularly try to include a guarantee promise by the seller in the company purchase agreements regarding the whereabouts of key employees. But what is the employee worth? Can the value of the employee even be expressed in money?
To illustrate the problem, we will use an asset deal as an example of the problem. Let’s assume that the IT company “Code 01 GmbH” wants to separate from a division. The “IT Services” division to be spun off is to be sold to a strategic investor as part of an asset deal. The assets to be sold are defined accordingly. In our example these are
- Maintenance and service contracts
- Land and buildings of the unit to be split off (branch)
- 10 Employees necessary for the performance of the contracts
- 2 employees for sales and project management
It is in the nature of things that the transition of employees cannot happen without their knowledge and consent. After all, people cannot simply be sold. Accordingly, the question arises as to how a buyer can secure the retention of the most important employees in the company. What does it mean for him financially if an employee refuses to give his consent? Or he hands in his notice after the transfer? The question is:
What is the employee worth?
There are a few approaches to this in the literature in the area of intangible asset valuation, and it is well worth taking a closer look at them. However, in our case we will of course only consider the monetary methods. Two approaches are to be distinguished here: The cost-oriented and the income-value-oriented approaches. For those who would like to take a detailed look at the procedures and subject matter, I recommend this Book by Kasperzak and Nestler.
In practice, the cost-oriented methods have prevailed. In particular, the cost-oriented approach based on replacement costs is very popular.
Cost-based approach with replacement costs
The replacement cost of an employee is made up of the three items:
- Procurement costs
- Training costs
- Dismissal costs
In our case study we can leave the redundancy costs out of it. After all, the buyer has no intention of throwing the important employees out the door.
Let’s look at the procurement costs. These are divided into direct and indirect costs. Direct costs include, for example, recruitment, selection, hiring and deployment. Consequently, the indirect costs are the internal costs, for example for promotion (to motivate the employee).
The training costs are divided analogously into direct and indirect costs. Here, the direct costs are associated with the formal training, instruction or on-the-job training. Indirect costs are generated by the trainer who has to make his time available.
In our initial example, we can consequently make this calculation:
The calculation states: The buyer would have to raise 119,152 EUR if he had to raise the entire workforce (all employee assets) in the event of a departure in order to restore the initial state. It is, of course, more than doubtful that the business would still function in the event of the departure of all employees. According to the calculation, the process would take a good 5 months. The total calculation for all employees is rather theoretical. It is more likely that in a transition one or two employees will quit - rarely all. In this case, the buyer can easily calculate the depreciation of the assets that seem important to him. Moreover, he can fix it in writing, for example in the form of a guarantee.
As with all valuation procedures, the same applies to the valuation of these important, intangible assets: The final price is determined by supply and demand.
Tips for further reading:
Business sale vs. real estate sale
Advice traps in the process of business succession
The costs of a business succession or an M&A project
How do you recognise a reputable business sale advisor?
Selling a company in the IT industry
Alternatives in transaction negotiations
Calculate enterprise value SME
The 5 most important contents of an entrepreneurial emergency kit
What is the value of the invisible capital of employees in the sale of a company?
One can actually calculate the monetary value of an employee. There are cost-oriented and income-value-oriented approaches to this. In practice, the cost-oriented approach based on replacement costs has proven particularly effective. This approach is based on three cost factors: Procurement costs include the recruitment, selection, hiring and deployment of a new employee. Training costs include all costs to train an employee to an equivalent level. The dismissal costs are unimportant in our case. After all, the buyer has no intention of parting with them.
The shortage of skilled workers in particular makes employees an important asset. This is where the simple principle of supply and demand comes into play. Added to this are the high costs of hiring new staff.
