If you are planning your exit from the business, what is the best asset that you have to sell? Unless you have patented product, exclusive rights, or long-term customer contracts, you answer was likely “Our people.”
Even if you have strategic differentiation like the ones above, “our people” was still likely a top-three answer. Proponents of Human Resource Accounting correctly point out that few businesses have a bigger investment. Hiring, training and developing talent is at the center of most successful organizations.
But people aren’t chattels. How can someone rationally consider paying top dollar for your successful business when its best asset might disappear the day after closing the sale?
Securing a great price for your company means paying attention to its value drivers. Those include documentation of reproducible processes and quality controls. Customer diversity, long term relationships and a clear marketing strategy are also important. All those pale, however, against the ability to assure a transition of your key people.
The Last Minute Bonus
There are numerous stories in the planning world about owners who neglected to protect their best asset. Some are certainly apocryphal, but they all go something liked this.
Bob was straightening up his desk in preparation to move to his smaller, temporary office. He kept pulling out his phone to check if his bank balance reflected the proceeds from the closing wire transfer. He wasn’t thrilled about spending a few months as an employee, but it was well worth it.
There was a quick knock on the door and Jack, the Director of Sales walked right in. Bob thought of how much that irked him, but he wouldn’t have to deal with it much longer. As usual, Jack got right to the point.
“Congratulations Boss. I know that you put many years into building this company, and from what the buyers just told me, you received a great price. I’ll miss working with you.”
Jack didn’t wait for a response. “That new owner, Carl, seems like a nice enough guy. You know, he told me that I was one of the main reasons they bought this business, and they have big plans for me in the future.”
Bob knew the other shoe was about to drop. “So I was thinking. Considering how important I am to a successful transition, how much of that big check were you planning to share with me?”
Bob thought of the escrow fund in the agreement, and how it required transfer of the company without major changes in personnel. He took a deep breath, wondering how much of it he should use for an opening offer.
Sooner Rather than Later
The time to negotiate a stay bonus is before you start the sale process, not after there is money on the table. Securing your best asset adds value to the business, and greatly lessens the chance that an employee will derail any deal.
Many owners hesitate because they fear telling key employees that the business may be sold. That is a rational concern, but the sooner you bring it up, the more inertia will be on your side. When things don’t change right away, people tend to go back to what they were doing.
Explain that transitioning is a logical step for every business, and that once you start the process, it could take years. You want to recognize the employee’s contribution, but you also want to make sure that he or she gives any new owners a fair chance.
Stay bonuses very widely, but an additional half-year’s salary is reasonable in return for two years of post-transition service. In some cases, the bonus can involve a percentage of the sale proceeds placed in escrow and paid after the transition period. The benefit can also vest over time, strengthening your short-term retention.
One thing is certain. Protecting your best asset before starting an exit process will be cheaper than being forced to do it afterwards.
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John, You are spot on about the importance of being able to get your staff to support the transition. The process starts by finding out as much as you can about the buyer’s intentions for your employees. With that information you can plan for incentives that give employees who you believe are likely to be retained, a reason to make the transition work,and offer reasonable compensation to those who are likely to be terminated. The retained employees have a better attitude if they believe that the seller cared about those who did not fit the new owner’s plans. In one acquisition situation we debated how much money was appropriate and how it should be distributed. Our decision was that the employees had exceeded normal commitments to the company, particularly in the early stages and they deserved financial reward. We voted and arrived at 5% of the capital gain on the sale. These funds were allocated on a pro-rata basis of the employee’s accumulated base salary without allowance for bonuses. On this basis a secretary who had worked for 5 years at $30,000 per year and earned a total of $150,000 received the same amount as a VP of Sales who had worked 1 year and earned $150,000. Those employees who were retained in the transition were subject to vesting requirements. Those who were released were paid a month after termination. We considered a longer delay after termination to discourage defection to get a quick cash bonus, but the conditions offered by the buyer made it unlikely that retained employees would quit. This arrangement resulted in a smooth transition.
Great example, David. Thanks!
The easiest thing to do is to share the profits of the company with your employees and to give them ownership before the sale. I was not planning to sell my company, but when the right offer came in I sold and my employees shared over a half a million dollars among 35 employees. 25 years later most still remain with the company..