Motivating Key Employees in Connection with a Sale of the Company
When you start to think about selling your company, there are many considerations to assess. These considerations often vary on a case-by-case basis. However, one consideration typically remains constant: you want to maximize the value of your company. As you prepare for a sale of your company, your key employees will play an important role in maximizing the company’s value. Because change is hard for everyone, you will want to be careful in communicating your plans to your key employees and your approach should take into account both timing and content. The challenge is to keep your key employees motivated leading up to and during the sale process and beyond. Here we discuss some of the mechanisms you can utilize to motivate key employees in connection with a contemplated sale transaction.
Aside from offering financial incentives (discussed next), it is also crucial to motivate your key employees by framing the sale in a positive light. From the outset of sharing the sale transaction with key employees, it is important to describe the transaction as one of growth and success. The prospective owners are interested in buying the company because they see great value in the business and an attractive future. Therefore, focus the narrative around the future prospects of the company after the sale, rather than emphasizing your own retirement or post-transaction plans.
With a bonus paid upon the closing of the transaction, you reward key employees once the transaction is finalized. The closing bonus can be structured as a percentage of the deal value, a flat amount, or a combination of the two. By structuring the closing bonus as a percentage of the deal value, you get the benefit of financially aligning key employees with your goal of maximizing the company’s value but run the risk of giving away a larger (or smaller) bonus than intended. This issue can be addressed by setting a cap and a floor on the maximum and the minimum closing bonuses key employees may receive. Aligning your key employees with your own closing goals should increase their commitment to do the hard work necessary to close the sale.
Leading up to the close, an intensity bonus can be used to compensate key employees for the intense work necessary to prepare for and close a sale. For some of your key employees, the work will be a second, almost full-time job, which will require these employees to balance their day-to-day functions along with the additional work in connection with sale preparation. Compensation for this extra effort can go a long way toward a smooth diligence process.
Retention bonuses incentivize key employees to stay for a period of time after consummation of the transaction. Along with incentivizing a key employee to stay and do the job required, a retention bonus also helps assure the buyer that the company will be delivered in the form expected by the buyer. Some things to consider as you set up retention bonuses include which key employees are eligible, how long the retention period is, how large the bonus needs to be to effectively motivate your key employees to stay, and how the bonuses will be paid out.
Incentive plans come in many forms and can involve either the granting of equity in a company or the granting of so-called phantom equity, which is a contractual right that typically allows an employee to benefit from, without actual ownership in, an agreed portion of the growth in value of a company. With either incentive structure, there is often some agreed-upon vesting schedule, and in many cases, a sale of the company will accelerate said vesting schedule. There are many considerations involved in designing an incentive plan, but a benefit of such a plan can be to reward an employee upon a sale of the company.
It is important to note that there are tax considerations with respect to each of the mechanisms just discussed. The tax attributes should be considered and accounted for when planning sale-related financial incentives.
We would be happy to discuss further any of the strategies presented here or any other issues of concern when you are thinking about selling your company.
Brian M. Heitzer
Email: [email protected]