Buyers purchase businesses to acquire the future cash flow that the opportunity represents. They want to insure that the cash flow generating power of the acquired business remains intact; this means preserving the management team and key employees among other assets of the target.
Sellers, in preparing their businesses for sale, want to make the business as attractive as possible to a buyer. Change of ownership is a particularly critical moment for the business and a buyer will be particularly sensitive to the possibility of losing key employees during the transition period. For a buyer, this will be a large perceived risk. Additional risk for a buyer always translates into a lower purchase price for the seller. Therefore, sellers will attempt to mitigate a buyer’s risk in order to maintain a higher sales price. One way to do this is using a so-called Retention or Stay Bonus.
A Stay Bonus is different from more general bonus arrangements which might be designed to reward an employee’s contribution to productivity or profitability. A Stay Bonus, as its name suggests, is designed to get the employee to remain employed during the transition period.
Stay Bonuses can be negotiated anytime during the sales process. However, we always counsel sellers to establish the terms of the bonus for critical employees as early as possible … preferably well before the company is put on the market. This is because the negotiating leverage of the employee might increase as the deal approaches closing. For example, we know of a situation in which the buyer insisted that a key sales person be “tied-up” prior to closing. It became obvious to the sales person that the deal was being held up pending his signing an employment agreement. The sales person was able to successfully insist on a lucrative bonus provision.
Stay Bonuses can be paid by either the buyer or the seller, but usually the seller takes the initiative. The seller, of course, can establish the arrangement much earlier in the process. Sometimes buyers will agree to pay a portion of the bonus.
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