Key Employees Series: Part 1- Handcuffing Key Employees To Your Company

There are four characteristics of a successful Employee Incentive Plan. Namely, such plans should:Be specific, not arbitrary, and be in writing;Be tied to performance standards;Make substantial bonuses; andHandcuff the key employee to the business.In this issue we focus on the last characteristic; handcuffing the key employees to the business. The goal of the handcuff is to keep the employee with the company the day after and even years after the bonus is awarded. To help achieve this goal, owners and their advisors typically incorporate several techniques into a stock purchase or non-qualified deferred compensation plan.Vesting ScheduleFirst, a vesting schedule handcuffs employees to the company for a time period necessary to become entitled to the bonus awarded. I prefer a continual or rolling vesting schedule in which a single vesting schedule is applied separately to each year’s contribution. Using this schedule, an employee is handcuffed to the company for a long period of time because the key employee is never fully vested in the most recent contribution.Let’s assume that a lump sum award is assigned to an employee: one-half of which is given immediately and the other half subject to a five-year vesting schedule. Only in the final year is the […]

Read More

Children Series: Part 1-Being Fair to All Children

Most parents have a natural inclination to distribute every asset equally to all children. The thought of giving one asset, and very likely the most valuable asset, to one child is considered unequal and, therefore, unfair to the other children.Yet, upon closer examination, leaving the business entirely to the business-active child (BAC) and making an equitable distribution of the balance of family assets to the inactive children (and perhaps to the BAC as well) is the fairest plan of all.”Fairness” in this context is usually a judgment parents make about what they think is fair to the children. What it overlooks is what the children deem to be fair to each of them. This perspective is all too often missing in family transition planning. To determine what is fair, assume the point of view of the business-active child and then that of the inactive child.Let’s look at why the business-active child might well resent having a co-owner sibling who is inactive in the business. Perhaps one of these reasons applies:It is the efforts of the business-active child to increase the value of the business that should be rewarded. You probably offered all of your children an equal opportunity to participate in the business and become owners. Yet, only one child […]

Read More

Creating Value in Your Business to Get Top Dollar When You Leave It

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition? There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.”Walk A Mile In A Buyer’s ShoesTo get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on value drivers.The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner […]

Read More