Losing key employees – the people on whom you rely to keep your company running smoothly – can be detrimental to any business. The most successful owners understand just how critical it is to keep them in place and ensure business continuity by compensating those key employees commensurate with their contribution to the business.
One of the chief concerns for most of the exiting business owners we work with is how to make sure that their dedicated employees are taken care of when the business changes hands. But what many owners might not realize is just how important those employees are when you’re transitioning out of your business. Ensuring that your key management team remains intact will definitely impact the value of your business. Buyers want key employees to stay with the business and losing them can kill a deal or decrease the value of your business.
The sale of a business is a time of uncertainty for the employees. And if not handled properly, key employees may start to worry, begin looking for other opportunities, and decide to leave in order to protect themselves. Ensuring the retention of your key employees as part of your overall business exit planning process is essential. Let’s look some of the things you’ll need to consider and some of the strategies you can employ to help keep your employees in place.
Who Are Your Key Employees?
First you’ll need to determine who your key employees are. Identify team members who are essential because of their experience, indispensable knowledge, relationships with employees, vendors or customers, responsibility for significant revenue, or their involvement with critical development or projects. Part of this process will also include anticipating who the buyer will see as integral to the successful transition of ownership.
The Key Employee Perspective
Once you determine who your essential employees are, you will need to figure out what you can offer to help keep them in place. It’s important to understand the motivations of your key employees in addition to the potential risk of them leaving.
- What is most important to them as it relates to being part of your company. What their motivations are such as: financial compensation, acknowledgement, new challenges, security in retirement.
- How long they have they been with the company.
- Where they are in terms of their career, i.e., just starting out in their career or close to retirement.
- Whether they have dependent family members.
- The demand for their services in the marketplace and whether you are compensating them competitively.
Deciding whether or not stay with your business during a transition is a big decision for an employee. There is certainly some risk for them. If the company fails or is shut down, they could be out of a job. On the other hand, if the transaction is successful with the right compensation plan in place, they could potentially enjoy numerous benefits from the sale, such as stock options, new career opportunities, a retention package from the buyer, and being part of the successful combined venture. Proper planning and clear communication will be essential. You want to ensure that the economic and personal incentive to stay is made clear. But you also need to think about how to retain your key employees BEFORE you start the selling process.
Employee Retention Strategies
Your key employees need to be sufficiently “compensated” prior to and during the transfer of the business. Consider one or more of these retention strategies to provide an incentive for them to stay before and after the sale:
- Higher Salaries.
- Stock Options.
- Deferred Compensation: A portion of the employee’s compensation is deferred for a specified period of time, often retirement, which also defers the tax liability to a time when they may be in a lower tax bracket.
- Long-Term Incentive Plans: Performance-based compensation set over a specified period of time.
- Retirement Packages: Compensation packages paid out upon retirement, which can include healthcare benefits for the employee and dependent family members.
- Insurances: May include life, disability, and long-term care insurance coverage that will help protect their family members should something happen to them.
- Additional Perks: May include the use of private cars, private jets, travel accommodations, club memberships, etc.
- Stay Bonuses: A bonus that is partially paid at closing with the balance paid after a specified period of time, such as six months to a year.
- Employee Retention Agreement: Specifies that the employee will receive their current compensation (or more) and benefits through a certain period of time, and if they are terminated earlier as a result of the transaction, they will receive separation pay equal to this.
- Phantom Stock Agreement: A bonus that’s paid upon the sale of the business that is usually based on a percentage of the total transaction value.
Early planning is critical. These types of agreements can be complicated and need to be considered carefully as part of your overall exit strategy. Of course selecting key employee retention strategies will be specific to your employees’ needs and wants, your company, and your industry but we hope this outline will serve as a guide to get you started. As always, make sure to consult your legal and financial advisors to craft the best employee retention strategies for your business.
Planning for your business sale is a process, not an event, and you need to start well in advance in order to maximize business value and ensure a smooth transition. Key employee retention is just one of the many steps you need to take to secure their future and yours. Begin your planning process today!