- Author Chris Hadjiyianni
- Year Date 2018
- Location Winnipeg
- Category Business
One of a business owner’s greatest challenges is to attract, motivate, and keep key employees. As owners approach the end of the marathon of exiting their businesses, often tired and distracted by everything they’ve done, they begin to assume that it is no longer worthwhile to keep and motivate key employees. However, keeping key employees is not only worthwhile but also necessary if the business is to be sold at the highest possible price.
A basic premise of key-employee incentive planning is to keep the key employee as a long term, contributing member of the company. Consequently, incentive plans incorporate relatively long vesting schedules and provide benefits that are relatively moderate in the early years but become substantial as the years pass (usually after the employee has participated in a plan for at least five years).
Business owners considering a sale to a third party must take every reasonable step to ensure that their key employees remain at their posts, even as the owners prepare to leave theirs. The key employees’ efforts to maintain cash flow are critical to maximizing the business’ eventual sale price, and these key employees may need to shoulder extra duties as the owner’s attention wanes or is diverted.
However, given that few sales to third parties are all-cash sales, owners are usually exposed to post-sale financial risk. If the business does not continue to perform after closing, the owner may not be entitled to receive the earn out portion of the sale price, or the buyer may default on the owner’s carry back (e.g., promissory note) for the balance of the purchase price. This is one reason why it is common for owners to offer key employees a share of the “spoils” when the business is sold.
Of course, the ideal time to begin key employee incentive planning is well before a business transfer occurs. However, even owners who are already considering a would be buyer’s offer would do well to begin the planning process. As the old saying goes, “The best time to plant a tree is 75 years ago. The second best time is today.” So, today, let’s look at the fictional case of John Ewing, owner of Ewing Lubricants Inc., as told by an Exit Planning Advisor.