When selling a business, a primary concern of both the seller and buyer is how to retain key staff. Losing key staff can be catastrophic for any business, and is likely to cripple a sale process. So how do you ensure they stick around?
Employees handle uncertainty regarding their futures in different and sometimes unpredictable ways. Some leave prematurely, often to less satisfying roles with other organisations.
Despite the inevitable uncertainties during the sale process, it is usually in their interest to stay with the business and the new owners. New owners are often larger firms offering broader services, new opportunities, growth plans, capital, promotional opportunities, scope for travel and diversity. The new owners are likely to be more dependent on key staff than the previous owners were, so they now have an opportunity to shine through. It makes sense to encourage key staff to remain committed during and after the sale.
Staff retention and integration is always high on the priorities for intending new owners, so key staff will need to be involved in the sale process and meet the intending new owners at some stage. For more information on this aspect, refer to Divest Merge Acquire’s article Who do you tell when you’re going to sell.
So how can you ensure staff retention during and after the sale?
One way to encourage key employees to stay during a sale process and afterwards with the new owners is to offer a retention bonus.
The aim of a retention bonus is to align the interests of each of the 3 key stakeholder groups and enhance value for all involved:
- Sellers – want to sell and exit. Having key staff in place makes the business more valuable and saleable, and also allows them to shorten their post-sale handover period;
- Buyers – want to retain knowledge and expertise, relationships with customers and suppliers, overall capacity, and have a smooth transition with minimal disruption to the business. Having the key employees incentivised to stay gives both the employees and the new owners encouragement to work together and manage through changes and any unsettling times.
- Employees – new ownership usually offers upside for key employees. They are in the spotlight and may become the ‘experts’ in the absence of exiting working owners. New owners usually herald new opportunities, growth plans and the removal of previous “handbrakes” on growth. The extensive opportunities can often be masked to employees by the inherent perceived uncertainties throughout the process, and additional encouragement may be needed to see the full picture. This is normally an exciting period for those who stay on.
Aligning the goals of all parties with a retention bonus
Any retention bonus should be transparent to all 3 parties and is generally financial in nature.
It is important to structure the bonus effectively.
There is no point paying it all out as soon as the sale occurs or staff may then leave. Such a structure aligns the interests of both employees and the sellers, but not the buyers – whose perceived risk would actually increase knowing employees will receive a lump sum immediately with no longer term incentive to stick around. Ignoring the interests of one or more parties is often be enough to jeopardise the sale, and would therefore be self-defeating.
The recommended structure of a retention bonus is to pay one component on settlement, and a second contingent component after an agreed period of time (eg. after 12 months), provided the staff member is still employed in the business.
The rationale for offering a retention bonus is also important. A cynical view would be that it is to bribe employees to stay and work to the agenda of both the seller and buyer. However a more positive view is to consider it as a ‘thank you’ for contributing to enhancing the value of the business over time, for participating in the sale process and agreeing to assist new owners settle in.
When preparing to offer a retention bonus, it is important to consider the tax structure of the deal and how to optimise this for both the payer and payee. Any payment is likely to be taxable income to the recipient, but if the company shares are sold, it may or may not be deductible to the seller. You should obtain advice from your accountant/tax specialist on how to best structure these retentions under your circumstances.