Every business owner should compose an exit plan, even if the notion of selling the business appears to simply be a faraway thought for the future. Preparing an exit plan early will arm the business owner with the correct tools for when the time comes to sell.
When a business owner constructs an exit plan, he or she ought to focus heavily on building a strategy that will generate a high amount of employee retention. While the buyer may desire to restructure post-closing, they will also want to retain the key staff members that have played a large part in helping the business be successful up to this point. Employees tend to be wary of a new buyer; often out of the fear of losing job security or out of loyalty to the previous owner. A company is only as strong as its staff, so if the buyer is stuck with only a handful of remaining employees once the full transition has been completed, the acquisition could lose a great deal of value to the buyer.
Therefore, it is within the seller’s best interest to create incentives for employees to remain with the company throughout the transition process and beyond. The seller must convince their team that the decision to sell will only add benefit to the company, and therefore prove to be an advantage rather than a detriment to the employees.
One common manner in which a seller will convince employees to remain with the company, even after it changes hands, is through a stay bonus plan. This plan offers bonuses to key staff members once they have fulfilled its agreements (such as length of retention). However, only a small number of employees can be offered this bonus if it is to be viewed as valuable. It is important to note that any future increases in salaries or benefits that will accrue to the new owner be disclosed however.
The stay bonus may be delivered in a variety of manners. The incentivized program could reward employees with a cash advantage, but then it has the ability to allow the staff to leave the company directly after they receive their payout. Instead, any monetary incentives should be placed in an escrow account and only be provided once certain stipulations have been met. An escrow will allow the employee to gain a larger bonus in accordance with the length of time that they remain with the company. It is important to secure employee retention throughout the entire M&A process, as well as the duration of the seller’s earn-out period, if one is being implemented.
A stay bonus plan greatly lowers the risk for the buyer, and therefore encourages them to follow through with the deal. Consequently, not only will a solid exit plan support the seller in forming a blueprint for his or her own future, but it also has the ability to assist in the successful completion of the M&A deal.
If you would like to learn more about exit planning for your business, please contact George & Company. We would be more than happy to assist you in making the smoothest exit possible.