The following is an excerpt from Noah Rosenfarb’s book “Exit: Healthy, Wealthy and Wise – A Step-By-Step Guide to Conquering Business, Personal, Family and Financial Issues“.
When you exit your company, you want to get the most out of your time spent planning. In order to maximize your efforts, you need your employees’ help to prepare the business for the transition and then to make that transition a successful endeavor. While you negotiate a sale, you need to keep the on-going management of the company in mind to ensure that everything is running smoothly so that no surprises crop up at a critical point in the process. To that end, there are four important aspects to consider: discussions with management, employee incentives and your personal assistant.
Discussions with Management
You should be having ongoing discussions with your employees and management team regarding your transition. This can be a difficult process to start, but the sooner it is done, the more beneficial it is. A one-time conversation to describe your transition is not an effective way to communicate with staff, but neither is constant discussion. There should be recurring discussion, perhaps during your annual strategic planning or budgeting meeting, or on some other scheduled, regular basis.
The purpose of having these conversations sooner rather than later, is to evaluate where your management team is in their level of responsibility and authority. Once that is established, the next step is to find ways to delegate responsibility from the owner to streamline the management of the company. Ideally, the owner is not tied to running every major aspect of the business. The goal is to have owners who have a role in their business because they enjoy it, or because they are the best salespeople, or the best CFOs. Owners who are involved in roles in which they are highly competent are more successful than those involved out of necessity.
The value of a business is enhanced if the owner is not required to run the business. You want to become dispensable. It’s a good selling point if a buyer will only have to replace some very specific functions as opposed to a series of executive functions when the owner has exited. The first step is identifying all of your responsibilities as the owner. Next, you need to create a plan to have your management team assume as many of these responsibilities as possible. Typically you will need to focus on the performance metrics and/or policies and procedures that you want in place prior to assigning decision-making responsibility and authority.
It is important not to wait until the last minute to have a conversation with your stakeholders, both internal and external. You don’t want to spring a sale on your team the day after a letter of intent is signed. Your management team is going to be required to participate in the due diligence process, and if they are not aware of that prior to its start, there are going to be delays and setbacks while you discuss the sale process and reasoning.
If you do wait until very late to talk to your employees, the discussion must be handled very delicately. At that point, employees are going to be wondering about job security and may be upset at the lack of information they have received up to that point. This is an area when owners can find themselves “held hostage” by employees who demand unreasonable closing bonuses because they are worried about what the sale means for their employment and compensation. Losing a key employee during negotiations can derail the process, creating delays and possibly causing a deal to fall apart.
Employee Incentives
There are several ways to avoid these problems: sign employee agreements, implement employee incentive programs, or create a phantom equity plan. Employee agreements should be signed with all employees in the company, not just key staff members. Agreements should reflect terms that are important to you as an owner. Often, there are non-compete clauses or confidentiality clauses included in these agreements. It may be hard to enforce, but it is better to have an agreement in place, even if it is difficult to enforce, rather than have no agreement at all.
One of the best practices, especially for owners who are strategically thinking about their exit plan, is an incentive-based compensation plan in which the management team is given incentives for attaining certain goals or targets which are usually based on the earnings of the company. This helps increase the value of the company because everyone is working toward the same goal: increasing earnings. These incentive plans are also a way to keep management teams on board during the transition period to help grow the business and ensure a smooth change of hands.
A third option, which is often added in conjunction with incentive-based compensation, is phantom equity. In this case, the employee is not going to actually receive ownership in the business. However, they will receive money based on a formula when the company is eventually sold. For example, your business might be valued at $20 million, and you agree to give your key executive 5% of the sale price in excess of $20 million, paid 6 months after closing. If the company sells for $30 million, they will get 5% of the extra $10 million in value. That would result in $500,000 for the employee (and $9,500,000 for the ownership group).
Your Personal Assistant/Secretary
Another essential staff member to consider is your secretary or personal assistant. If your company has been in business for a long period of time and you have had the same personal assistant for much of that time, it is important to recognize the responsibility of that person and their role in the transition of the business. During the exit planning process, you, as owner, are going to have more meetings with the planning team and prospective buyers, more phone calls with advisors and perhaps even tours of the company. It is important for a personal assistant to be in the owner’s confidence in order to handle delicate issues as they arise during the transition. The personal assistant needs to know the facts in order to be able to handle sensitive phone calls or answer questions from inquisitive employees.
Owners often decide to give incentives to their personal assistant as well. This isn’t necessarily the same type of incentive that management or the sales team receives. Rather, this is a post-transaction bonus opportunity so that the personal assistant will stay with the company through the transition. You don’t want to lose a valuable assistant just months before your sale because of job security concerns. You want and need your assistant to stick with you through the transition period. Often, this incentive is based on years of employment using a simple formula such as one week’s pay for each year they have been with the company.
Another important thing to consider regarding this part of the transition is how many personal tasks your assistant handles for you. Perhaps the assistant picks up dry cleaning, schedules a pet sitter, or helps arrange travel for family members. As an owner selling your business, you need to recognize what your life will be like when you aren’t the owner any longer and do not have this type of assistance. If it’s feasible, an owner may consider hiring the personal assistant after the sale to continue as a household employee in order to help absorb the shock of the change the owner is experiencing as a result of the sale. Having this support system in place can certainly help ease the transition into life after ownership.
Reducing Stress Through the Sale Process
It’s important to make provisions for company management throughout the planning and transition phases. Selling your business can be a stressful time. Dealing with the loss of key employees in the middle of that process can cause many problems and setbacks. It is wise to give employees information as soon as possible and to reassure them, whether that’s through continued conversations or incentive plans. As you transfer more responsibility from your shoulders to your management team, this is also a time of personal reflection and planning for your life after transition. With the management of your company provided for, the transition period will run much more smoothly and efficiently.