Management, Succession Planning
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:
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?