COACH'S CORNER
By Barry Knepper
November 2008
As Seen In Queensborough - The Magazine of the Queens Chamber of Commerce

TAB Member's Question:
I am in the process of selling my business. I am interested in some perspective on paying bonuses to my management team if such a transaction comes to pass. I have no agreements in place right now, so this is not an obligation. Some of the managers know of the potential transaction and have dropped some hints.

Responses:
I have seen these types of bonuses used in two ways. The first is to reward loyal employees for their contribution to the growth and success of the company. The second is a "retention" bonus or "golden handcuffs", to encourage key staff to remain with the new owners for a period of time, payable at the end of the agreed period.

The single most important part of a retention package is that the employees' loyalty to the company during a transition of ownership is maintained. The payments are not made unless the employee is still employed at the specified time for payment unless the employee is terminated before by the new owners.

These arrangements are generally funded by the seller with funds received from the sale. The amount needs to be significant enough to overcome employee's concerns and insecurities of possibly being let go after the ownership transfers. This type of arrangement is attractive to a buyer because it ties the key people to the business for some period, allowing the new owner to be able to decide which employees they would like to keep. If the buyer is funding the bonus payments for the seller, there is a side benefit of the buyer not having to come up with as much cash at the time of the closing of the transaction.

An alternative to selling the business to a third party is to sell the business to the employees of the company through the use of a Employee Stock Ownership Plan("ESOP") , which offers great tax benefits and a controlled financial and management transition plan. The employees acquire a beneficial interest in the company that will attract, retain, motivate, and reward them.