"Brain drain" is the potential loss of institutional knowledge that occurs when the current owner and members of his team depart after the company is sold. Diversifying the institutional knowledge among a wider group of employees and memorializing processes and procedures is important to prevent brain drain, both the perception and the reality.
Like individuals, companies have accumulated knowledge that helps them function and thrive. This institutional knowledge can be in the form on an operations manual or be more abstract like a company wide approach to dealing with a challenging customer who likes to be addressed by his nickname or should only be contacted by email. This accumulated knowledge is every bit as vital to a company’s success as their best selling product. Unlike the best selling product, a new owner cannot be sure knowledge will be there after the transaction, especially if key data is only in the head of the owner.
Most businesses start out with a small group of employees or even a single owner. As the business grows, the owner and the key employees control certain customer relationships or processes by always handling certain tasks themselves. While the business may benefit from the consistency of these individuals in the short term, long-term value can be reduced by concentrating too much knowledge with a few individuals. In some cases, the business owner can be held “hostage” by a key employee who threatens to leave if not paid more.
Consider the case of a service company that handled voiceovers for major corporate call centers. The owner had developed the company from a small operation to a company with national and international clients. He was involved in every new piece of business for the first twenty years of the company’s existence in some form or fashion. Over time he developed a staff of employees capable of handling all the needs of even the most major clients. He was no longer the primary point of contact for any client, but still knew about each client relationship.
When it came time to sell the company, it was easy to explain to a buyer how the company would function without the owner, despite his twenty-five plus years in the business. The development of a true team approach to servicing the client allowed the owner to find a quality buyer for the company (willing to pay cash at closing!) and made for a smooth transition to new ownership.