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What you pay now may pay off later

A clear compensation plan helps businesses effectively recruit talent, rewards the best of them for productivity gains and engenders longevity with the firm. Less obvious but equally important is the role of compensation plans in a business sale and succession planning. Motivated firms develop remuneration techniques geared to retain key personnel as well as retire them in a manner that meets their highest expectations.

To increase the likelihood of successful transitions, many M&A professionals look beyond the buy-sell agreement and conventional funding techniques. They whet the appetites of prospective buyers by helping define workable and attractive compensation plans for business owners and their executives.

So if you're planning to exit your business, an unambiguous succession and compensation plan will enhance its value. Both qualitative and quantitative techniques can be used to assess this often-overlooked facet of selling a business.

Qualitative techniques

Business owners occasionally think about selling their business and perhaps have even identified what's needed to grow it. It's the next step people often skip. Many company leaders have not implemented both the qualitative and quantitative techniques necessary to ensure a successful transition. It's important to demonstrate to your management team that the company will continue to flourish, no matter whose hands are at the helm.

Communicate early and often. Share your expectations with key management team members, including your belief that the business will continue and flourish after your exit. Conversely, as the business owner, it's crucial that you understand your team's expectations. If yours and theirs vary greatly, the likelihood for future success diminishes.

Integrate your management team. Continual coordination with your banker, accountant and attorney, as well as your investment and insurance advisors, will nurture a seamless succession. Generally, these relationships have developed over many years so these professionals understand the essence of prior decisions and can help deliver future results. Often, for example, an investment banker helps maintain stability by managing cash for growth needs as well as any potential acquisition or sale of the entity.

Validate corporate direction. An external "advisory board" promotes growth and provides an objective view of an enterprise. The advisory board may comprise eight to 12 friends, clients or colleagues acting as a beacon through uncertain times. Ready access to opinions and wisdom from experienced professionals concerned and interested in your company's future achievements is invaluable.

Quantitative techniques

Thus far, we've looked at several of the more amorphous methods for making your company a "better sell." Now let's look at "measurable" ways to increase your company's value and help ensure a smooth succession for your executives. Such measures include:

Phantom stock options. These arrangements provide the management team with an interest in the future growth of the business. They acquire a vested stake in the company and benefit financially, through distributions, during periods of geometric growth or at future sale. Frequently, these plans are immunized, matching liabilities with assets to diminish prospective buyer concerns about any financial liability.

Nonqualified deferred compensation. These plans allow management to delay income tax on a portion of their compensation until a later point in time. They typically supplement qualified retirement plans and allow selected executives to receive an annual retirement income in excess of the limits imposed on tax-qualified plans.

Deferred bonus arrangement. In lieu of receiving a cash bonus, the company defers a portion of compensation for future delivery with interest.

Personal and portable disability income. These plans ensure an income stream for executives to compensate for lost earnings (or the ability to earn their own occupation income) during a pre-retirement period of disability. But keep in mind that, unlike typical group or association programs, disability income from individual plans isn't offset by tax-qualified distributions, workers' compensation or any other benefit income.

Elder care benefits. These plans provide a monthly income for a period of years while the insured is chronically ill and unable to perform activities of daily living, such as when suffering severe cognitive impairment. The triggering event may result from an accident or sickness, or simply be an unfortunate facet of aging. Benefits may be prefunded, are guaranteed by large financial institutions, and are often paid income tax free by the executive, spouse or both.

Thinking ahead

By focusing on your management team's needs, you nurture an environment that can promote both personal and professional growth, management longevity, and future success. In fact, develop a strategic model for, say, your business's next five years. It'll pay off in the end. Please call us to help you assess your succession planning.

Sidebar: 4 questions to consider

Every business owner's mind occasionally turns to what will happen financially if he or she decides to exit the company. To crystallize your thinking and prepare for that eventuality, ask yourself these four questions:

  1. Will my qualified retirement plan provide enough annual retirement income? And if so, for how long?
  2. Do I have family members who will be able to carry the business to the next level?
  3. Is my management team willing to work with my family? Will the team remain focused and productive in my absence knowing they may never become a "stakeholder" in the business?
  4. If I don't have family groomed to succeed me, is my management team in a position to safely purchase my stock following my retirement?