October 18, 2019  
 
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Business Exit Planning Advice

 

Pre-Exit Employee Incentive Programs

Written by Ted Thomas for Gaebler Ventures

Exit planner Ted Thomas offers some excellent business planning advice on pre-exit employee incentive programs.

No sophisticated buyer will seriously consider acquiring a company that doesn't have a strong management team.
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As a result, years prior to exiting a business, smart business owners develop a good management team that can run the business well even if the owner is not present.

In theory, this will attract more buyers, raise the business exit valuation, and allow the business owner to exit the business without being subject to earnout incentives that require the business owner to stay active in the business after the exit transaction closes.

Exit planning best practices involve developing an employee incentive plan that motivates key employees to stay and build value in the organization. Typically, employee incentive plans will either be cash-based or equity-based, but, in either case, a good employee incentive plan will typically have the following characteristics:

  • Substantial Financial Awards. Key employees will not be motivated by small incentives. Research suggests that a potential bonus equal to, at least, ten to thirty percent of annual compensation, is necessary to motivate an employee to modify performance.
  • Well-Defined Performance Standards. There must be measurable, objective performance standards that determine whether key employees will receive their incentive awards and the size of the incentive award.
  • Alignment With Business Exit Goals A primary goal of the employee incentive program is to increase the company valuation in preparation for an exit. As such, the employee incentive program should be tied to company net income, revenue levels or other key metrics that drive business value.
  • Vesting. Employees should be offered "golden handcuffs" that encourage them to stay for a defined period of time. If the employee severs his employment before he is "fully vested," he forfeits at least part of the bonus.
  • Documented in Writing. A strong employee incentive plan is not communicated verbally and agreed upon with a handshake. The key employee incentive plan must be communicated in writing, and key employees must understand exactly how the plan works. The plan must be simple, easy to read, and should be communicated face-to-face to employees with advisors present to answer any questions.

A well-designed employee incentive program will motivate your employees and cause them to stay with your company. It will ramp up the valuation of your company and put you in good standing as you prepare to exit the business.

Despite the clear value of creating a written exit plan for a company and putting in place a strong employee incentive plan, you might be surprised to know that very few businesses have put these essential exit planning mechanisms in place.

Believe me, with all of the time and effort you've put into your business, these are not tasks that you want to neglect. Not taking them seriously can result in your not being able to leave your business in style and in your not making the most of what is likely one of the most significant transitions of your lifetime.

Ted Thomas is the Managing Partner of Sun Exit Advisors. He has enjoyed over 30 years of hands-on experience as a business owner, business consultant, real estate investor and entrepreneurial executive. Sun Exit Advisors assists owners in navigating the complex world of transition and exit planning. In collaboration with existing counsel and other relevant advisors, Ted's firm develops a comprehensive plan to ensure the achievement of his clients' exit objectives.

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