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Why You Need Stay Bonuses For Key Employees When Selling A Business

The decision to sell a business is often accompanied by a lot of anxieties. The most pressing of these anxieties is,how will I tell, and then keep, my key employees?”  A sale transaction is difficult for the owner of the business but is also a tremendous amount of work for many others.  Think of a CFO or controller, who now in addition to their normal job will have to fulfill the demands of due diligence – which are extensive.  The same goes for your plant manager, your human resources person, and many other key managers.  An added complication is that the people for whom due diligence is often the most difficult for are also the most likely to be let go post transaction – and, they probably know it.

So what do you do as a business owner to take care of your people while simultaneously making sure that your transaction moves along as smoothly as possible?  Stay or Retention bonuses

Stay bonuses are payments to key managers that encourage them to stick around through, and sometimes after, a business sale transaction.

Just as an aside – we don’t say golden handcuffs anymore – very 1980s – You might as well be Bud Fox  – “Blue Horseshoe Loves Anacott Steel.”  

Who Gets Them?

Generally we see stay bonuses used for three different types of employees in the acquisition world.

  1. The employee that is going to have to do a lot of work for the transaction in addition to their normal job.  This is usually the CFO, the HR person, and a Plant Manager or Operations Manager, but can include other people depending on each company’s organization chart.
  2. An employee that is critical to the future performance of the company.  This can vary depending on the type of business, but can be a salesperson with key relationships or the one person who understands your code.
  3. Someone that you have to make aware of the transaction for whatever reason and you would like them to stay put.  Perhaps you have a great operations manager that would be wonderful in management presentations to buyers or a plant manager who you would like to give tours.  
So What Do These Look Like?

Stay bonuses can be structured in a variety of ways to suit your individual needs and preferences.  They can also be tailored based on an employee’s position.  Here are some general guidelines:

They should be meaningful – they are often between 50% and 100%+ of an employee’s salary

This is not the time to get cheap or cute with assets that could walk out the door and impact your transaction.  Make these a number that will get everyone’s attention and will let them know that this is important.  

They should be paid in two parts – before and after the transaction 

The payouts on stay bonuses are such that the first part (some percentage between 0% and 50%) is paid when the transaction closes and the remainder is paid after a time period with the buyer at the helm.  Remember – the goal is for employees to stay.  This gives the buyer some guarantee that there will be a smooth and orderly transition of the business and he or she isn’t just left on day one of owning the company with no one that knows how to run the thing.

Sellers might not have to pay for all the after part 

Sometimes you can negotiate sharing the cost of the stay bonus with the buyer.  Or, depending on timing of your sale process, you can structure a program with the buyer for employees that will effectively take the place of the “after part” of the stay bonus and you don’t need to include it in your bonus package.  Many buyers will include bonuses or options for key employees that may be used as incentives for key employees as carrots to entice them to stick around.

Who Writes Them?

You work with your transaction attorney to write these.  A seasoned lawyer will know exactly what you are looking for and should have no problem putting these together in short order.

Some Limitations Of The Stay Bonus

Timing is Critical!

When you have made the decision to sell your business, get the stay bonus agreements in place as early as possible.  Do not wait until you are in the middle or near the end of a transaction.  Delivering key employees might be a requirement of an acquisition (especially if there is a particularly important R&D or sales person). If you do not have a stay agreement in place early on, you will give these employees the power to negotiate an agreement knowing that they are holding the sale of your business at ransom.  That is a LOT of leverage.  

Think of these examples:  I have a technology company and I have a very important R&D employee.  I think I might sell my business and I am just starting the process.  I have presented the R&D employee with a stay bonus agreement.  She will probably have her attorney look at it and will make a change or two, but we can negotiate knowing that there is nothing eminent and if things really got out of hand, I could theoretically call the whole thing off.

Now – let’s say it’s two days before closing and a buyer is paying a ridiculously high price for my technology business.  I have promised to deliver my key employees including the R&D person.  I present her with the stay bonus agreement.  She wants to have her attorney look at it – AHHH – I panic because we are suppose to close in two days.  The R&D person’s attorney knows that we are closing in two days and asks for a bonus of 200% of salary instead of 100%.  My entire transaction is at stake at this point and I panic and pay it.  Other employees hear about this and, well, you get how this turns out.  If you wait too long, important employees can hold your transaction hostage.

Don’t Get Overly Generous

Here is the opposite problem of the business owner that wants to be cheap with key employees – the owner that is overly generous.  Don’t make retention bonuses so big that they are life changing when they are paid.  This can have the opposite of the intended effect and cause people to leave versus stay with the business.  

In closing – keeping key employees is an important part of most M&A transactions and is certainly an important aspect of augmenting valuation.  Like many things, stay bonuses are most effective with a little bit of advanced planning.  They can be an effective tool for minimizing disruption during and after an acquisition and maximizing your sale price.  

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