Birthday parties aside, surprises are rarely welcome, and
often lead to costly recovery plans.
That’s why cruise lines sell trip insurance by the boat load! When it comes to orchestrating the perfect
vacation, your personal time and money is just too precious to put up to
chance.
Unfortunately many business owners do not take the same care
when protecting their own businesses. They have the standard insurances,
contingency plans and protocols in place, but are not well prepared for the
disruptive surprises that key managers and staff often bring forward during the
transition process. Fortunately many nasty surprises related to key talent are
in fact predictable and avoidable if you
are well prepared.
Jay, the owner of a cleaning supply distribution company was
unfortunately not prepared.
He had high hopes for a successful exit from his
business. And he had good reason to be
confident. He had a thriving enterprise, in part because he had a small but high
performing management team, for which he was proud and thankful. He provided ongoing team development, individual
skills training and made certain he shared his know how with each manager.
Jay was rewarded with growth and profitability well beyond
his competitors. And the personal gratification of building a loyal, and high functioning
team was beyond his expectations.
Then disaster struck!
One Thursday afternoon, two of his lead managers tendered their
resignations. Jay was dumbstruck. Why?
How could this have happened?
Didn’t he do all the right things?
Jay was rattled, then hurt, then angry.
How could these two do this to me, after all I have done for them?
But then he realized:
this was a predictable surprise. Jay knew he had not done everything to reduce
the risk of losing key talent. Although Jay
had rewarded his managers with annual bonuses, he didn’t think longer term.
But his managers did. And without
economic reasons to stay, they didn’t.
And now the consequences were piling up in Jay’s head:
- How long will it take to replace them?
- How much will it cost?
- How will the company keep up its performance while he looks for replacements?
- How will he reassign responsibilities in the short term?
- How will he manage all of this, and how about the rest of his employees?
But the number one issue:
surely this will derail his plans
to exit the business as he had intended.
And worst of all- he didn’t have a recovery plan.
How could Jay have avoided this predictable surprise, turned
disaster?
He could have asked himself better questions and created a plan for
more deeply engaging his key staff long before his transition.
Your Action Plan For Avoiding Disruptive Surprises During Your Exit:
Start with your transition objectives. This is especially true if you are
contemplating an exit in the next 3-5 years.
First, ask yourself:
- When do you wish to exit?
- What will the company need to be worth when you exit?
- How will you exit- through an external sale or internal transfer?
Once you know where the company needs to be to achieve your
outcomes, you and your exit advisor can determine what you need your key employees to accomplish so you attain your
goals.
Then, with these objectives in mind, create a Long
Term Incentive Plan for key managers.
The idea is to go beyond rewarding top talent for what they
are currently contributing, and begin to create a system for keeping essential
managers engaged and contributing well into the future. This will help you avoid nasty surprises when
it comes to your top talent.
Cash bonuses are great short term rewards for employees, but
never take the place of ‘golden handcuffs’ for critical managers, especially as
you contemplate your transition. These
managers are pivotal to the company’s success and must be compelled to stay. They must be motivated to lead exceptional
performance before, during and after your transition.
Long Term Incentive Plans can take many forms, be equity or
cash based, reward performance across several metrics and have both company and
employee tax implications.
Once you know where the company needs to be to achieve your
outcomes, you and your exit advisor can determine what you need your key employees to accomplish so you attain your goals.
There are far too many specific features to consider here, but
your plan should have these foundational elements:
- Your plan must be specific, in writing and easily communicated. Your key employees need to fully understand the answers to their most important concerns: what is expected and what’s in it for them.
- Your plan objectives must be directly tied to your exit objectives. Too often owners focus just on top line growth when transition value is more often influenced by profitability.
- Your plan needs to offer tangible benefits for your people. Key managers are highly motivated to meet the performance targets when the rewards are significant and financially meaningful to them.
- Your plan should be rolled out in stages and given enough time to mature. Vesting over time ensures commitment to long term goals and retention.
Life, like business is unpredictable. But often surprises,
especially costly ones can be avoided.
Talk to your exit advisor today if you don’t have a LTIP as
a key element of your plan to exit your business when you want, with the
financial and personal rewards you desire.
For further information, read the first blog in this series: A Surefire Tactic to Improve Your Valuation at Exit
