Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
MANY BUSINESS OWNERS envision one day transitioning ownership of their company to an “outside” buyer.
It could be a “financial” buyer (think, private equity group) or a “strategic” buyer (think, acquirer in the same industry or business). Regardless of the description, potential buyers look to reduce risk associated with their investment in your company.
The predictability and reliability of continued cash flow, for example, is one variable that reduces risk.
Diversified customer base is another. Operating systems that generate above industry margins, may be another. Growth opportunities, another. The list goes on. But one value driver, often overlooked by owners, is the existence and continuity of their key management team.
It is often stated, that when an owner represents the “face” of an organization, the organization has less value in the marketplace. That’s because it concentrates talent, customer relations, operational knowledge, etc.
Just as potential buyers look for a diversified customer base within an organization, they also look for a diversified leadership team. Having both reduces a buyer’s perceived risk.
And while mentoring, recruiting and rewarding key personnel are subjects worth exploring, this piece will cover one technique used to retain those key performers during ownership transitions.
This strategy comes with the caveat, of course, that you have already taken your key managers into your confidence and have shared your intent to eventually transition ownership of the company to an outside buyer, thereby avoiding the quagmire of them learning of your intent over the water cooler.
Being left with the all too familiar sentiment of, “Wait a minute…. he/she is going to take off with the money that I/we helped create?” Again, when, what and how you share your intentions with key personnel appears to be another topic, for future discussion.
Presuming all are “on board,” the question becomes, “How do I motivate my key managers to stay during a transition period?”
A Stay Bonus Plan provides a recognizable incentive for your key employees to stay on board and help your business through an ownership transition period. It is designed to offer substantial financial benefit (cash) within a short period of time, contingent upon the business being sold.
It represents a promise from you – not the new owners. It also provides a level of stability and certainty for your company and its employees to succeed.
You identify which of your key personnel has direct or indirect impact on company growth and profitability and who will be considered essential to a new owner. Criteria can be left to your discretion solely or can be managed by a committee designated by you.
You determine the length of time the participants need to remain with the company after a sale in order to receive a bonus. Typically, these plans are short-term in nature and are designed with time periods of one to three years. The vesting schedule is also the payment schedule for the Stay Bonus Plan.
For example, a participant becomes vested in his or her share at the closing of the sale and receives one-third of the payment at that time, one-third at the first anniversary, and the remainder at the second anniversary of the closing date. Again, vesting and payout are open to owner discretion.
You agree to escrow a portion of the purchase price to fund your key employee’s stay bonus. As a seller, you own the monies held in escrow, thereby keeping those funds outside the acquiring party’s possession. In effect, you will own the monies in the escrow account, subject to the key people’s attainment of their vesting schedule.
If they should leave prior to becoming fully vested, they relinquish undistributed amounts. Any funds remaining in the escrow will revert to you. If the key employee is involuntarily terminated by the new owner, he or she may be eligible to receive the balance of the escrow amount. Again, the design is left to seller’s discretion.
Plan Presentation. This step is critical. It involves communicating the plan design, benefit and purpose at a key employee educational meeting. This meeting is conducted by the owner(s) and adviser(s) in order to offer an objective resource and to field participant feedback.
In contrast to typical key employee incentive/retention plans the Stay Bonus Plan accomplishes several vital objectives for your key management team.
These include:
The key employee’s economic reward is separate from the rise or fall in the value of the acquiring company’s stock. Rather, it is based upon the value of the company at the date of sale. Payments are in cash, not in the new company’s stock.
Payment will be made from the escrow account when the key employee vests in that account. Unlike most incentive plans that vest over an extended period and pay only after vesting is completed, this program provides a rapid reward for your key employees — provided they remain with the new organization.
Because the monies are held in escrow, for the exclusive benefit of your key employee participants and are not controlled or owned by the acquiring company, the chance that they will leave the new organization is minimized or eliminated. The key employees must simply remain employed for a period designated within the plan. As they stay, they receive their entire benefit amount, in cash.
Formalizing a Stay Bonus Plan via legal documentation is advised and necessary. And the plan should be drafted by a qualified business attorney.
Maximizing company value and eventual sale price, is a multi-year endeavor for most business owners. And while focusing on financial/operational “metrics” is common, don’t forget the most important “intangible” asset you possess, your key personnel. Developing a Stay Bonus Plan early, and communicating it, will help to create the “wealth multiplier” effect most owners/key personnel strive for.
