Unfortunately, most business owners lock the doors of their plant or office every night, but forget to take even simple steps to protect this important asset. In this article, we explore at a very high level, how to keep and retain your key employees before and during an ownership transition.

There are two basic techniques to keep key employees: employment agreements and special compensation arrangements. Every key employee should have a formal employment agreement even if they are employed on an "at will" basis. This agreement spells out the terms of their compensation, the basis of their employment, the grounds for termination, and other important matters that we will cover below.

One of the greatest fears buyers have is that a company's key employees will walk out the door as soon as they buy a company. Key employees often walk, especially if they feel they have been overlooked or unfairly treated during the sale process, or if they are not comfortable with the new owners or managers.

If the key employees are members of your executive, sales, or operational management teams, the value of your company could be dramatically affected by their departure. For this reason and others, finding a way to keep these key employees is a critical element in your exit plan whether it involves selling to a third-party buyer or a transition to a younger generation family member.

Incentives

If you are worried that one or more of your key employees may get nervous and leave you at a critical time like during the sale of your business, you should establish some compensation plan that takes those circumstances into account and provides these employees a clear incentive to stay. Many clients have successfully used a combination of one, or all, of the following:

• A stay bonus, often 50% or more of their base salary. This gives key employees a real incentive to stay with the company through a reasonable transition period with the new owner.
• A phantom equity agreement. This gives your key employee(s) a small share of the gains from the sale of your business and is much better than giving them outright shares in your company.
• A golden parachute. This provides them with a bonus in the event they are terminated by the buyer after the transaction in complete.

If All Else Fails, Damage Control

At the same time, prudent business owners always needs to think about damage control. If keeping these key employees is not possible, the owner must be able to minimize whatever potential damage they can do to the company if they go to work for the competition. This is essential to protect the value of your company. There are three basic ways to do this:

• Non-compete agreements
• Non-solicitation agreements
• Nondisclosure agreements

All of these concepts should be addressed in the employment agreement for your key employees. If you'd like to explore these or other ways to protect the value of your business before you sell, contact the MidCap Advisors office nearest you for a no cost, no obligation meeting.