Stay bonuses help keep a secret

July 1, 2015

By Scott Bushkie, CBI, M&AMI
Cornerstone Business Services, Inc.

One of our clients is pretty much an absentee business owner. As we talked about selling his company and all the due diligence information a buyer would require, it became clear he’d have to let his management staff know the business was for sale.

Selling your business usually means asking your managers to pull sales reports, employee hire dates, depreciation schedules and all sorts of documentation. Usually you can wave off the unusual requests as part of strategic plan or bank request.

But there’s only so many extra questions you can ask and strangers you can walk through the door before people start getting suspicious. And since this business owner rarely visited to begin with, he figured the best thing to do was be upfront.

Although each case is unique, in most cases we advise against informing employees that the business is for sale. Unfortunately many employees fear the unknown and let their imagination run wild contemplating all the negative things that could happen. Actually, it is normal for most if not all of the employees to retain their jobs. They may actually have a better chance for advancement with a new owner who wants to grow the company.

The more people who know your business is for sale, the greater the chance that confidentiality will be broken. Breaches in confidentiality can trigger a lot of pressure from competitors, customers, and employees. Rumor gets out that your business is for sale and you won’t win yourself any new clients. Meanwhile, your competitors may see the time is right for poaching the customers you do have.

And, one of the very worst things that can happen is employees will start to jump ship—particularly your managers or other key personnel. Your best people are also the most mobile. If their future looks uncertain, they may take care of their own destiny and seek a different job.

So there are a number of reasons why confidentiality is important. But what do you do when critical internal people must be informed? In those situations, we recommend “stay bonuses.”

A stay bonus provides an incentive to stay with the company during a transition. And it provides an incentive for the employee to cooperate and assist with that transition (including maintaining confidentiality).

We see stay bonuses that range from 20 percent to 100 percent of an employee’s annual salary. The trick is to portion out the bonus so an employee doesn’t receive it all at once. It’s common to allocate about 50 percent of the total stay bonus at closing and another 50 percent six months or a year later.

Buyers want assurances the management team will stick around. A stay bonus significantly increases the chances that a key employee will stay through the sale. It’s a nice carrot for the employee, and it makes your company more saleable (and in some cases more valuable) because it lowers the risk for the buyer. It also says “thank you” to your management team or key employees who helped you build the business.

By maintaining confidentiality a sale can be a win-win for you and your employees. Scott Bushkie is Principal of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 920-436-9890 or sbushkie@cornerstone-business.com. Copyright 2012.