How to Retain Key Employees when Selling Your Business

There are many options, but one common practice is to provide a “stay-bonus” agreement to key employees.

What is a stay-bonus agreement? Simply put, this is an agreement that will provide the employee financial incentive to stay through the sales process and for a period post-closing. Quite often these are structured so that the employee gets a percentage of the bonus at closing, then a percentage after 12 months and more after 24 months or 36 months. The idea is to incentivize them to participate in the selling process (if needed) and reduce risk to a buyer because that a key employee will stay for at least 1-3 years post-close. The new ownership will most likely provide their own employment agreement, which would be totally separate from your stay-bonus arrangement.

From a timing perspective, stay bonus agreements are usually offered to key employees when the owner is preparing to sell the company, but this can vary by employee and circumstances. Someone who you don’t identify as key to your company’s future may be offered a financial incentive during due diligence to ensure their participation in the short-term post-sale integration process. Integration bonuses are typically offered to CFOs, controllers, or IT specialists.

Offering a stay bonus early on arises when an employee is critical to future performance and would be difficult to replace, or when you need to involve them in the selling process.

It is important to look at this from an employee’s perspective. Imagine that you have been a dedicated employee for many years, and you helped grow the company to the success it is now. How would you feel if the owner didn’t tell you about a pending sale? Or for that matter didn’t offer you a special financial reward for all your years of hard work. Often business owners describe their management team or key employees as “family.” This is the time to treat them as such.