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Management, Succession Planning

How To Retain Key Employees to Protect the Value of Your Shop

October 14, 2016

Succession Planning Question 4: How can you retain key employees.

The long term plan for many successful shop owners is to one day sell the business and use the proceeds to retire or move on to another enterprise. Naturally, we’d all like to get the highest possible price for our business. As discussed in the preceding Succession Planning blog post, there are a number of issues that impact the sale price of a business.

Chief among these is the caliber of key employees, their depth of experience, their relationships with customers and suppliers, and the likelihood that they will remain with the business after it’s sold. This means it is essential to not only hire high performing people, but to also create a workplace environment that encourages them to stay.

The fact is, retaining key employees requires more than just a paycheck. Of course they must be fairly and competitively compensated for their work, but there are many other ways to hold onto employees. Here are a few:

  • Continuing education: Offer opportunities for employees to increase their knowledge of CNC technologies, machining techniques and good business practices.
  • Provide opportunities for advancement: Promoting from within lets employees know that, if they so desire, they have a future with the company beyond their present job.
  • Recognize achievements: Everyone wants their work appreciated. Along with annual reviews and periodic recognitions, simply using the words “thank you,” on a regular basis is a powerful and often underused form of appreciation.
  • Share the “Big Picture:” Employees who have a clear understanding of their role in the company’s overall success are more engaged and enjoy a greater sense of satisfaction.
  • Invite them to the party: When looking for ideas to help move the company forward, or to improve processes, invite a cross section of your best employees to participate in brainstorming sessions. Then be sure to let them know what decisions you make so they see that they are a valuable part of the process.

While every employee is important, retaining the key members of your management team is crucial to maximizing the value of your shop to potential buyers. Beyond the normal compensation and performance bonuses, consider ways to enable these key team members to think of the company as their own. This can take many forms, including offering stock options, allowing them to invest in the business or, if you don’t wish to surrender any percentage of ownership, by offering phantom stock.

Phantom stock affords key members of management the opportunity to share in the business profits or growth of value over time. There are a variety of ways to set up phantom stock, one of which is to establish a baseline value of the business and, at a certain time in the future (typically 5 – 10 years), determine how much the value of the business has increased. This triggers a “dividend” payable to the phantom stock holders. In this way they are rewarded for helping to grow the business and are incentivized to remain onboard.

Of course, any such plan requires that the company is on sound financial footing – and not just on paper. The financial statements of any company must be realistic, consistent and timely. This is always important, but never more critical than when you are trying to sell your business.

In our next installment we’ll address the question: How sound are your financial statements?

Succession Planning 5: How to be Sure Your Financial Statements Will Help You Sell Your Business