Over the course of representing sellers of businesses, I have discovered that many of them are very concerned about the well-being of their employees upon the sale of the company.  Consequently, they scramble in a last minute effort to address this concern.

If properly advised, they will create some form of a bonus plan (“stay bonus”) aimed at keeping key employees focused on contributing to a successful sale.  This stay bonus arrangement is not only predicated upon the sale, but also requires employees to remain with the company until the sale is consummated. The bonus amount is usually tied to the purchase price that will ultimately be paid for the business, and in that way, they are incentivized to maximize their efforts in continuing to grow the business. It is not uncommon in such arrangements to insert a contingency that requires key employees to negotiate in good faith for a new employment relationship with the buyer. “Good faith” may be defined as agreeing to accept an employment arrangement with the buyer under terms and conditions which substantially mirror their employment arrangement with the seller or an enhanced version of that employment arrangement that was anticipated had the employer not sold the business.  In consideration for the employee’s promise to negotiate in good faith, the employee will often be asked to accept reasonable restrictive covenants or agreements, such as non-disclosure, non-solicitation and non-competition agreements.

Another approach sellers use to protect their employees is to negotiate for a provision within the Acquisition Agreement that obligates the buyer to continue to employ the seller’s employees, usually for a fixed period of time, or to offer a reasonable severance package as an alternative.

Although this reflects an owner’s genuine concern for his loyal employees’ future welfare, employees may not view it in the same way, because it is motivated by the sale and is coupled with its own quid pro quo.

Employees might view these provisions much differently if they were created many years prior to the sale of the business, and were part of a more comprehensive program put in place for employees who demonstrate loyalty, hard work and excellent performance over a period of years.

Although going into detail about each benefit plan mentioned below is outside the scope of this blog, I will list a number of them on which you can seek advice from your benefits consultant, your certified public accountant and your lawyer.  Each of these advisors should have experience in, and a complete understanding of, these plans and their requirements; a generalist will not be a suitable advisor.  These advisors should also understand the tax laws governing these plans, since the tax savings/benefits will drive the owner’s adoption of many of them.

Generally speaking, long-term plans (5 or more years prior to a sale) are plans that create the greatest incentives for employees while providing the employer with the largest return on his investments.

This list is not exhaustive, nor in any particular order of priority, but will provide you with an ample starting point:

Cash-Based Plans:

  • Non-Qualified Deferred Compensation
  • Stock Appreciation Rights Plans
  • Phantom Stock Plans
  • Stay Bonus Plan based upon Death of the owner(s)
  • Stay Bonus Plan based upon Sale of the Business

Ownership-Based Plans:

  • Stock Bonus Plans
  • Stock Purchase Plans
  • Stock Option Plans

Two final points: (1) the ownership-based plans create the rights, duties and obligations of an owner, so that the implications in managing the business should be completely understood; and (2) all of these plans should be tailored to your particular business, i.e. canned documents will not serve your interests and may very well work against you.