If you own a closely-held business, one of the most critical questions you may ask yourself is, “How can I maximize the value of my company for future sale?” Although you may not anticipate selling in the short-term, there are initiatives you can and should consider years in advance to better prepare you and your business for one of the most important events you will face as a business owner. One such initiative is creating a plan to ensure your key employees continue employment after a sale.
There is a direct correlation between the value of a company and its key employees. Most businesses have at least one or two key employees who are disproportionally responsible for the success of the company. Hence, in the event of a future sale, the retention of these employees will become a point of concern to prospective buyers. Incentivizing these key employees now may:
- Allow you to discuss potential sales with them and gain advocates and assistance in the sale process
- Increase the likelihood they will continue employment during the post-sale period
- Help alleviate some of a buyer’s concern and preserve, or even increase, your company’s value
In worst-case scenarios, key employees who become aware of a sale during due diligence will be faced with a sense of uncertainty regarding future employment and potential premature separation. Having a plan in place can prevent these unintended consequences.
You may now be asking yourself what can be done as a business owner to preserve the value of your company during and after the selling process. Or, better yet, what strategies can be implemented to maximize the potential selling price while simultaneously safeguarding retention and incentivizing key employees?
Retention Bonus & Agreement
A retention bonus is paid in addition to regular compensation and is offered as an incentive to retain key employees during the selling process. Typically, the bonus is paid out by the seller when the transaction is finalized and is forfeited if the employee leaves prior to the sale. It is concurrently used with a retention agreement. The agreement establishes the legal commitment and specifies the details of the arrangement,
such as: payout amount, retention period and undertakings.
In substance, phantom stock is a form of compensation that mirrors that of equity ownership. The arrangement pays out a cash reward based on the increase in value of the company over a period of time. At inception, an initial value is established and “phantom” units, or hypothetical stock, are used to track appreciation in value. One of the advantages, from an owner’s perspective, is the strategy does not actually require any change in ownership structure.
Management Equity Plans
The most complex and comprehensive of options related to management retention gives ownership to key employees. The agreements have a wide range of structures and are generally subject to certain vesting requirements based on time, performance or both. How these plans are designed are limited only by your imagination. While they can be the most complex, and the most expensive to implement, they are considered to be very effective and are often instituted by buyers if there is not already a plan of this type in place.
These are just three of the options that can be implemented to help with the retention of key management personnel to assist in maintaining or enhancing the value of your company. If you would like to learn more about how you might be able to implement one of these plans or assistance with an analysis of the financial impact of these plans on your business, please contact us.