Let’s say that you are in the later stages of selling your business to an outside third party. A third-party buyer is going to want assurances that your key people are going to stay on after you exit and that the business does not revolve around you. If you do not have a way to incentivize your key people to stay before, during, and after the transition of ownership of your business, you will likely see the value of your business plummet.
In this week’s video, we’re talking about how to use the non-qualified deferred compensation plan to:
- Motivate your employees to grow profitability and increase the value of your business.
- Retain your top talent before, during and after your transition.
- And how to reward those key employees after the business is sold and transitioned to the new owner.
Click here to watch the full video or read the full video transcript, below.
A potential buyer wants to know that the people who have all the know-how and can keep the business running after you’re gone, are going to stay. While we can’t guarantee that they’re going to stay, there are things that we can do and there are things we can put in place to increase the odds significantly that they’re going to stay and not ruin a deal by leaving either right before or right after you transition out of the business.
RETAINING TOP TALENT WITH THE NON-QUALIFIED DEFERRED COMP PLAN
Today, I want to talk about retaining top talent with the non-qualified deferred compensation plan. A couple of weeks ago, I did part 1 in this series which was an introductory to the basics on non-qualified deferred plans and why they can be a powerful and very effective tool when it comes to retaining and rewarding your key employees as part of the overall exit strategy and exit plan for leaving your business.
NON-QUALIFIED DEFERRED COMP – Incentivize Employees To Grow Your Business
We can use a non-qualified deferred compensation plan to incentivize employees to grow profitability, and as a result, the value of the business.This is a key piece of the non-qualified deferred comp plan and you may want to consider putting it in place years in advance prior to when you want to exit. Not only can this be used as an exit tool, it can also be used at any stage in the business when you want to appropriately reward your employees and align their interests with yours as the business owner.
One of the unique features of a non-qualified deferred compensation plan is that there’s a lot of flexibility in how you set up the design of the plan and how you reward your employees. One popular plan design would be, for all profits in excess of x number of dollars, those get distributed out at a certain percentage. Maybe 30% of the excess profits above x number of dollars for a given year gets split up among the people who are in the non-qualified deferred compensation plan. And because this is meant to be a plan for key people, you can have one person in this plan, two people, you could or a hundred people. It depends on how big your organization is and how many key employees you have.
NON-QUALIFIED DEFERRED COMP – Retain Employees Before, During & After Your Exit
The second way we can use a non-qualified deferred compensation plan, as an exit planning tool, is by rewarding your employees before, during, and after your transition, after your exit from the business. Your employees have put blood, sweat and tears in to the business, especially your key people, and we want to appropriately reward them and make sure that we handcuff them to the business through the transition.
Let’s say you have a key person who is a sales person, they manage all your key customer relationships and they bring in a lot of new business every year. We want to incentivize them. If they think that they can go out and do this on their own or they get a sense that you might be leaving, and they don’t want the uncertainty of a new owner coming on board, what’s to prevent them from leaving?
When you have a non-qualified deferred comp plan set up for them and there’s a significant amount of money in it because: it’s been building up, you’ve been making contributions over the years and it has a vesting schedule, it makes it harder if they decide to leave because they might lose the money.
In addition, when there’s forfeiture provisions that say if that employee violates your employment agreement and they take customers, they compete, they violate the clauses in your employment agreement – they don’t get any of this money!
NON-QUALIFIED DEFERRED COMP – Reward Employees After Your Business Is Sold
The last way that we can use a non-qualified deferred compensation plan is by using it to reward your employees when the business is sold. One of the provisions that you can set up in the plan design of the non-qualified deferred comp is that when there’s a change in ownership that they’re non-qualified deferred comp plan vests. What that means is that if I’m an employee and I have several hundred thousand dollars in my non-qualified deferred compensation plan and it vests after a change in ownership, when you leave, and a new owner comes on, they’re not going to have to wait until they retire, or they die to receive that money. They could receive that money while they’re still working.
You could set up a stay bonus plan that would also incentivize them to stay maybe at least two years through the transition, so you don’t lose them right after the transition is complete. A non-qualified deferred comp plan is an excellent way to reward the people who have put so much hard work and so many years of dedication into growing the business so that you had something to exit from and you were able to leave the business… hopefully with financial security.
NON-QUALIFIED DEFERRED COMP – Get Started
The very first step in thinking about and moving forward with setting up a non-qualified deferred comp plan is to really think about who your key people are. Who are the people that you could not afford to lose if they left today? Because you should have key people. If you don’t have any key people, that means that the business revolves around you and that’s not good for your exit planning anyway.
Anybody who buys the company wants to see that there is a transition team, that there’s a management team in place who can run the business after you’re gone. If the business revolves around you, I don’t think you have much of an exit plan there.
We want key people and it’s ok if there’s just one other key person in the company. Maybe you have 10 people, maybe you have a hundred key people, it really depends on who is key. We don’t want to include the summer intern who does social media marketing for us. They’re not a key person.
We want to be selective about who we’re including because we want these contributions to the key people to be significant. If we’re going to put x dollars into the plan, we want that money to not get spread across everybody, but the people who we must keep, the people who are too valuable to our organization to lose.