Retaining Key Employees
Several years ago, our firm represented a well-established, profitable business, with over 30 employees, many of which had been with the company 20+ years. The business owner engaged our firm to help him sell this company, which had been around over 35 years, with excellent financial results.
However, without consulting our firm, and with the best of intentions, the owner felt the obligation to inform his employees that he was selling the business. Had the owner consulted us beforehand, we would have warned him that employees might incorrectly assume that the buyer would probably make many changes, and their position would be at risk. While our actual experience is that buyers typically don’t make wholesale personnel changes, several key employees chose to leave the company. The value was impacted dramatically.
Just recently, we were asked by a business owner “What are the most important value drivers to a business buyer?” In our experience, the management team has to be one of the most important concerns of a savvy business buyer.
As reflected in some quotes from a panel of private equity buyers at a recent M&A conference:
- "The #1 thing when evaluating a company is the capability and integrity of the management team."
- "Our first consideration is always the people involved."
- "The #1 thing we consider when evaluating a potential investment is ‘How can we grow it?’ This encompasses many things, but MOST important in our assessment of our growth possibilities is the quality of the human capital."
Quotes from a Panel of Equity buyers at aN M&A Conference
Retain a Strong Management Team
Our firm has been around since 1984, and since that time handled over 400 business sale transactions. We have confirmed that having and retaining a strong management team will be a key component of the seller achieving maximum value. Many times the buyer will insist on meeting with the general manager, or in larger transactions, two or three key employees. Both the buyer and seller are invested in these key people remaining with the business for at least one or two years after the sale. So – if the management team is key to a successful business exit transaction – how does a business owner assure the buyer that the management team will stay?
Stay Bonus Agreements
An excellent solution to the issue of management continuity is to set up a Stay Bonus Agreement with each Key Employee. The Stay Bonus Agreements should be put in place well ahead of putting the business on the market. The Stay Bonus Agreement is contingent upon the occurrence of one of three events: death of the owner, disability of the owner, or change of ownership of the Company.
The Stay Bonus will call for an initial cash payment in the occurrence of any one of the three above-mentioned events, the second payment at the end of one year, and the third payment at the end of two years. Employees must be employed on the dates set out in the schedule to receive the bonus. The amount of the bonus must be significant enough to the employee to accomplish the objective. A suggested amount would be a total bonus of 75% to 100% of the employees’ annual compensation, paid one third at the date of the event, one third at the end of year one, and the last third at the end of year two. Payments are deducted as normal compensation, deductible to the company and taxable to the employee.
While this article outlines the concept and gives suggestions for how to structure the payments of the Stay Bonus, consult your attorney for the actual preparation of the Stay Bonus Agreements. The funds invested in putting this process in place will generate significant returns, both in the negotiations of the price of the business, and during the due diligence process. Keeping the management team in place is a key component of a successful business sale transaction.