Attracting and retaining motivated and dedicated key employees should be crucial to any business plan, but it is all too easy to mistake for a “back-burner” issue in the midst of succession and exit planning. You’re worried about financial security, timing, the future of your company… is it really a time to have recruiting and employee incentives at the forefront? Well, actually, it is! Retaining key management through your transition can significantly increase sale price; in turn, helping you with your original goals: security, timing, and the company’s future.
Recognizing the Value in Your Management Team
It’s logical to assume there are some basics that third-party purchasers are looking for in a possible purchase. Those basics are called value drivers. So what value drivers are prospective buyers looking for? Namely, cash flow that’s on the up-and-up, business systems that are efficient, a set customer base, an achievable growth strategy, tight financial controls, and… you guessed it… a management team that operates smoothly and productively.
Key employees hold significant responsibility for maintaining (and increasing!) your cash flow, customer relationships, and day-to-day operations. Some buyers won’t even consider purchasing a company without a strong set of key players in place, and many others are willing to pay a heftier sum for a business with key management at the helm throughout and following the transition. Why? Well, good help can be hard to find, and maintaining a team that works in harmony is even harder. With the weight of key management pushing so many of these value drivers in a successful direction, ultimately, you need them happy and productive to shoulder new responsibilities in your absence and to receive the highest possible price for your company.
Employee Incentives that Increasing Sale Price
According to Business Enterprise Institute, Inc. (BEI), a trusted advisory network for exit planning, the formula for retaining employees is pretty straight-forward: improve employee morale, thus reducing employee turnover. And, accomplishing a boost in morale may not be as costly or labor-intensive as you think. Many employees are looking for a voice. Staff meetings and job satisfaction surveys are a great way to hear and address employee concerns as well as to find out what’s working well.
In addition to a voice, employees need positive reinforcement; they want to hear from you where they excel, not just where improvements should be made. Flex time opportunities, verbal and written appreciation, and time off awarded for exemplary work can go a long way. Take a look at your working environment and culture. Everyone enjoys a pleasant work environment, and culture can come a long way with a few informal social get-togethers. Consider incorporating company-sponsored continuing education. Employees need to feel confident in their work, and many need to receive assignments that present challenge. Another area of importance is the potential for promotion. Let your employees know they have a chance to move up in the company.
Ideally, the time to put employee incentive plans in motion is well before the business transfer occurs. What truly motivates employees? Money. Salary hikes and performance bonuses motivate well. Key employees often remain happy and productive when they are part of long-term incentive plans as well, even those with relatively lengthy vesting schedules providing a small return in their early years of employment and increasing with time. An additional consideration is sharing the “spoils.” Cash offers to key employees can be made and fulfilled when your business sells. This type of incentive often works well in third-party sales, as the majority of sales are not all-cash. As the business owner, you need to promote continued growth to reduce your exposure to long-term financial risk. Keep in mind that these types of incentives should include a relatively small number of employees, generally around 8-10. You want your key employees to recognize the ultimate benefit as a substantial one worth working toward, and it should be a “stay bonus” that obligates these key players to remain with the company throughout the earnout period specified by the buyer. As for stock option plans, we say proceed with caution. It’s a popular choice, and there’s no need to steer clear entirely. Just remember that it’s human nature to shy from uncertainty. The trajectory of company stock value after the sale may make your key employees nervous, and nervous employees are a greater flight risk.
Key employee incentive considerations shouldn’t be made lightly during the exit planning process. It’s a careful balance. As BEI states, “Providing significant short-term bonuses recognizes that you cannot afford to lose your key employees […]. Paying them sufficient money means they cannot afford to leave the business.” Keeping your management team happy and motivated to maintain operations can make a substantial difference in your post-sale financial future. Are you prepared?
Take a moment to examine the areas of your exit plan that need to be addressed using the Altus Exit Strategies Smart Exit Planning: Ready or Not? Assessment.
The professionals at Altus Exit Strategies, a wholly owned subsidiary of Albin, Randall & Bennett, are industry leaders here to help your business through the Exit Planning process and other succession planning needs. Contact us to discuss a strategy for getting started.
by David Jean, Principal, CPA, CCIFP, CExP