How to Incentivize Employees During a Deal
Many owners like to reward their employees when a business is sold. It is a great way to thank the employees for their years of service and to help keep them around for the buyer. In addition, it is a good idea to pay key employees a bonus during the sale process. Not only will they be doing extra work during the sale, but a key person leaving can derail a deal and/or lower the value of the deal.
Key things to consider are: who, how much, what, when, and whether it benefits the buyer?
Who: Key employees are usually the main target for deal-related incentives. Most owners want to get their key employees involved at some point in the process, and almost all buyers will want to meet with the top employees (especially if the owner plans to be retired on the beach in six weeks). The key employees can also cause the most damage if they leave or if they are not engaged during the process. While it is a good idea to incentivize employees, remember that the owner must get paid first (do not give away the store, unless that is what you really want to do).
How much: This usually depends on the type of employee and their current compensation. For hourly workers, a few hundred dollars as a closing bonus can be a big deal. For the GM and top financial employee, the bonus should be more substantial. Each business should tailor the amount of the reward depending on past practices for performance bonuses and other rewards. The key employees will probably know how much the owner is getting for the business, especially if they are heavily involved in the process, so an owner must weigh their bonuses compared to the sale amount. Of course, the owner is the one who took on all the risk and made the capital investments, so the owner should get most of the proceeds. However, if an owner is getting millions and the key employees get a bucket of chicken, they might not be too motivated.
What: It turns out that employees really like cash. Stock options are popular with public and high-growth companies; however, they can be a problem with privately-owned companies. Employees can get hit with taxes or other unintended consequences, so it is best to be careful. Before starting any rewards programs beyond a little cash and fruit baskets, be sure to talk with your attorney and tax advisor. It is very important to document any incentive program and to make sure that the employee understands the rewards and the responsibilities. Giving away stock can sound “sexy,” however, it can be a permanent and lucrative reward to an employee who may not stick around for the long-term. All companies and situations are different, but cash is always good, as well as keeping it simple. Do not be tempted to give employees scrap boards as bonuses (but the gold on them might be appreciated).
When: For key employees, it is great to get them involved early in the process and to have them stick around after a deal is closed. The owner might accept an earnout as part of the deal or receive stock in the buyer’s company. Buyers certainly want the best employees to stay with the company. Owners may consider paying key employees something at the start of the process, a larger amount at closing, and a “stay bonus” at some point after closing. For hourly and other employees, a bonus and a great lunch at closing can be very much appreciated.
Does it benefit the buyer: As long as an incentive program is fair and appropriate, most buyers will be happy to hear that the employees will get part of the deal. Especially these days, it is hard to find employees, so both buyers and sellers will worry about employees getting nervous if they find out about the deal. Most buyers will have their own ideas about performance-based rewards going forward, so it is good to discuss the program with the buyer at the right time.
What if a deal does not happen? Yikes! Not only did the owner spend a lot of time and money, but some of the key employees had dollar signs in their eyes too. This can make it doubly painful for everyone involved. As long as the involved employees understand the reason for the deal, breaking up that can help to ease the pain. Communication is key in this situation.
Deal-based incentive plans can be a great way to motivate key employees and help ensure a successful deal. Owners should be careful to select the right program based on past practices and their company culture. The employees will mostly be sad to see you go, but they’ll be happy that you’ll be on your way to enjoying your retirement. A little cash, a great lunch, and maybe some gift cards will help to brighten their smiles and tighten their hugs as you say goodbye.
Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.
