How to Retain Key Employees when Selling Your Business

How to Retain Key Employees when Selling Your Business

One important area of discussions with sell-side clients is the retention of key employees during the sales process. These could be high-performing salespeople, key design engineers, or in many cases, management such as VP of Sales. From an acquirer perspective key employees are a huge benefit to the organization, but at the same time add substantial risk if they do not transfer with the business.

As a business owner, you need to determine who in your organization is critical to your operation. If you lost that person tomorrow, how would that impact the business? Most importantly, who has the relationships with your customers?

Most business owners will downplay the importance of key employees. They believe that if they push that narrative, a prospective buyer won’t be concerned. But the truth is that experienced buyers will flush that out during initial meetings or at the very least during due diligence. You should never let a buyer discover additional risk in the sales process, especially something that you could have mitigated prior to going to market.

So, what can an owner do?

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.

Steven Pappas
Partner
Touchstone Advisors