Build Business Value when Preparing for a Business Sale, Merger and Acquisition, (M&A) by Protecting Your Key People

By Gregory R. Caruso
Esquire, CPA, CVA

This article stresses the importance of proper business succession and exit planning. Build business value by implementing business succession and exit planning strategies in order to maximize your profits from your business sale, merger and acquisition, M&A, transitions. A key strategy used in succession and exit planning is to make sure your key management team will stay with your business all the way through a business sale, merger and acquisition, M&A, transaction.

I recently attended a lacrosse tournament up in Pennsylvania and was talking to one of the local team’s coaches. The Pennsylvania coach stated how they loved the game but that it was really hard for the coaches because they were teaching from books, not from experience. I could not help but compare this to my children’s lacrosse upbringing where most of their lives they had been coached by former All-Americans and members of National Champion teams. These guys clearly knew how to play and were teaching from experience. What an advantage for the local Annapolis – Baltimore boys to have this type of knowledge about the sport.

Your business is very similar in that you have a strong competitive advantage because your people already have experience performing their jobs. They efficiently create value and bottom line profits. They are not learning from a book. Your business has a small group of leaders at the top that, similar to coaches, must teach, motivate, and lead the team. Their knowledge and more importantly their experience help you make the profit that creates your business value.

To increase business value and you need to keep those people and give them reasons to stay. Clearly advancement, challenging assignments, and appreciation all create loyalty. Non-competes are used in many industries to limit job-hopping and loss of talent. On top of that many companies create financial inducements for key people to stay. Depending on the situation phantom stock, stay agreements and other means may be used.

The simplest financial means is a funded stay agreement. This agreement provides a bonus for longevity with the company or for staying with the company in the case of disability or death of the owner or change of ownership. A typical bonus amount may be 1 – 2 years salary. It typically will pay out at either the defined retirement time or a period of time after death, disability of the owner or change of ownership.

A well thought out stay agreement provides continuity reducing transfer risk for both planned exits and emergency exits due to health issues. It should be funded otherwise experienced key people will question if it will really be there for them. Often funding is augmented with insurance to bring down the total cash outlay.

Your business, like my son’s lacrosse team benefits from experienced leadership. Make sure you keep your key people and their contribution to your business value.

© 2008, Gregory Caruso

Gregory Caruso, CPA, Attorney, and Certified Valuation Analyst, is a Principal at Harvest Associates in Baltimore, Maryland. He is an expert in Succession and Exit Planning Strategies, Business Valuations, and Merger and Acquisitions working with owners who are devoted to improving their transaction profits and results. He is the author of the book 11 Secrets to Selling Your Business and a frequent speaker. To obtain a free initial consultation, arrange a speaking engagement, or order the book, contact Greg at 877-838-4966, gcaruso@harvestbusiness.com or http://www.harvestbusiness.com/