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COMPENSATION PLANS:  A LESS OBVIOUS BUT IMPORTANT ACQUISITION ISSUE

Acquiring companies often rely on the experience and knowledge of the acquired business's executives.  Sellers, therefore, can make their business more attractive to buyers by providing incentives for key managers to "buy in" to the sale and stay with the company.  Phantom stock options and nonqualified deferred compensation are two such incentives.

It may be one of the most difficult decisions you ever make. Selling your business means relinquishing control of something you’ve built and nurtured and that provides you with a steady income stream. It also means saying goodbye to many of the key employees who have helped you get your company to where it is today.

Many of these executives will remain with the business under new ownership, and, in fact, acquiring companies often rely on the experience and knowledge of these individuals — particularly during the integration stage. By creating an executive and owner compensation plan that rewards top performers, you not only motivate employees before a sale or succession, but you also make your company more attractive to potential buyers who wish to retain a successful team. What’s more, if you involve key employees in the process and take other steps to ensure a smooth transition, they’re more likely to “buy in” to the sale and new ownership.

Smooth the way
You may have thought about selling your business and even identified what you need to do to get there. But you may not have taken steps to ensure a successful transition.

Good communication — both early and often — is essential. Share your expectations with key management team members, including your belief that the business will continue to flourish after your exit. Conversely, as the business owner, it’s crucial that you understand your team’s expectations. If yours and theirs vary greatly, the likelihood for future success diminishes.

Continual coordination with your M&A advisor, accountant and attorney, as well as your investment and insurance advisors, will help nurture a seamless succession. An external advisory board that can help promote growth and provide an objective view of your enterprise is also valuable. The advisory board may comprise eight to 12 friends, clients or colleagues acting as a beacon through uncertain times. Ready access to opinions and wisdom from experienced professionals concerned and interested in your company’s future achievements can be invaluable.

Offer executive perks
There are also more measurable ways to increase your company’s value and help ensure a smooth succession for your executives. You might, for example, consider phantom stock options. These arrangements provide the management team with an interest in the future growth of the business. They acquire a vested stake in the company and benefit financially, through distributions, during periods of geometric growth or at future sale. Frequently, these plans are immunized, matching liabilities with assets to diminish prospective buyer concerns about any financial liability.

Nonqualified deferred compensation is also an option. These plans allow management to delay income tax on a portion of their compensation until a later point in time. They typically supplement qualified retirement plans and allow selected executives to receive an annual retirement income in excess of the limits imposed on tax-qualified plans. Another choice is to offer a deferred bonus arrangement. In lieu of providing a cash bonus, your company defers a portion of compensation for future delivery with interest.

Nonmonetary benefits can also prove attractive. Personal and portable disability income plans, for example, ensure an income stream for executives to compensate for lost earnings (or the ability to earn their own occupation income) during a preretirement period of disability. But keep in mind that, unlike typical group or association programs, disability income from individual plans isn’t offset by tax-qualified distributions, workers’ compensation or any other benefit income.

Elder care plans provide a monthly income for a period of years while the insured is chronically ill and unable to perform activities of daily living, such as when suffering severe cognitive impairment. The triggering event may result from an accident or sickness, or simply be an unfortunate facet of aging. Benefits may be prefunded, are guaranteed by large financial institutions, and are often paid income-tax free by the executive, spouse or both.

Position your company now
Whether you’re planning to sell your business in the next year or consider selling a long-term goal, competitive compensation should always be a priority. Not only does a strong compensation plan help you attract and retain the best talent, it may give your company an edge in the M&A marketplace.