IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family-owned businesses. The following blog has been provided by Mark Grubbs of WestPac Wealth Partners (https://www.westpacwealth.com/):
Don’t Let Your Key Employees Jump Ship After A Company Sale
Next-level management teams are the drivers behind building business value. But how can you and your advisors attract and keep next-level management teams? The answer lies within incentive plans.
When incentive plans are properly designed and implemented, your business has the potential to grow well after you sell. Well-executed incentive plans can motivate each member of your management team to measurably increase the value of your company.
It is recommended that incentive plans only reward key employees if the business value and/or cash flow increases by a predetermined amount each year. Each incentive plan should be customized to each key employees’ role and responsibilities and incorporate these four basic elements:
- Set performance standards that are tied to increasing the value/cash flow of the business necessary to meet your goals.
- Create specific, attainable standards.
- Implement substantial incentives and rewards if targets are met.
- “Handcuff” your key employees, so to speak, to make the incentives so appealing that they are encouraged to stay with the company until goals are achieved.
Many owners create incentive plans or bonuses for their key employees so that key employees cannot obtain the bonus unless they stick around for a certain amount of time. This way, you can increase the chances that once the business is sold your key employees stay and continue to grow your business.
This strategy “handcuffs” employees to the business by giving them greater access to compensation benefits the longer they stay. Having these types of plans in place may also increase the likelihood of a sale because potential buyers love to see trusted employees motivated to stay on and continue to grow the business.
Understand what motivates your employees. It might not only be a bonus of some kind. Think about promotions or other rewards. Are they interested in equity or cash? If your employees are not motivated to achieve their rewards, the incentive plan may become ineffective. The plan also becomes obsolete if the standards don’t increase the value of the business.
Consider these various forms of incentive plan alternatives:
- Non-Qualified Deferred Compensation plans with incentive-based benefit formulas
- Stock Appreciation Rights plans
- Phantom Stock plans Cash bonuses (current and deferred)
- Stock bonus plans
- Stock option plans
- Stock purchase plans with or without minority discounts
Each of these types of plans has its own strengths and weaknesses. The lesson here is that there are a variety of types of incentive plans to choose from.
Mark Grubbs is a MBA & CExp. If you have questions about the content of this article or would like to obtain information related to the services WestPac Wealth Partners offers its clients, Mr. Grubbs would welcome communication at (503) 207-4525 or Mark.Grubbs@WestPacWealth.com.
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Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a
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IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.