Seeking Seller Retention Guidance
September 06, 2021
by a searcher from Indiana University at Bloomington in Chicago, IL, USA
Hi all,
We're looking for guidance on seller retention post close on our first transaction. We're expected to close end of this month.
It's a small short-term property manager with 3 office workers; two of which are leaving (one is the seller). We found out the second office worker is leaving after our LOI was accepted. The second office worker leaving is an assistant to the operations manager.
Given that two-thirds of the office workforce is leaving, we think we are now acquiring a business materially different than what we agreed upon. We'd like the seller (who is physically remote) to help fill-in and train a new hire for the second office worker that's leaving. We've identified two internal candidates, both are maids, as potential replacements for the departing operations manager assistant.
We're considering offering the seller to work 4 days a week for free for the first three months. After that, the seller would be on an hourly consulting role for up to a year. The seller has agreed upon the hourly rate; but we have not proposed the free 3-month idea yet. We're thinking this 3-month period gives us enough time to train a new hire that is required, yet wasn't discovered until late in the diligence phase. FYI - This late discovery was no one's fault as the the assistant decided to leave after our LOI was accepted and before the acquisition was announced internally.
Two questions:
Is this a reasonable offer?
Anything else we should consider while we're drafting the purchase agreement and consulting agreements?
Thanks in advance.
from University of Southern California in North Palm Beach, FL, USA
https://cenkuslaw.com/common-mistakes-buying-business/
#5 – Not Getting Employee Incentive Plans Right
When buying a business employees incentive plans are typically an important aspect of M&A deals. You will spend a lot of time working on this issue if some members of the seller management team or other key employees are staying on with the business after closing. Employees don’t like change. Once they hear their company is in the process of being sold, the best and most mobile employees will put out feelers, looking for other opportunities. That doesn’t mean they’ll jump ship, but they will polish up their resume and touch base with recruiters, which means they may entertain offers. If those employees are important to making the deal work, you will need to take steps to keep them around. Compensation isn’t everything, of course. Employees will want to know how their job will change and understand the buyer’s strategies and management styles – those things may push away employees or help keep them around.
But, money matters, too. You probably don’t want to increase salaries unless they’re sub-market or you are normalizing them to salaries in your existing company. Instead, consider equity incentives or profit-sharing plans tied to performance. Stay bonuses – a bonus for sticking around – are useful tools, as well. Although, be sensitive to setting up a structure where the compensation is so great in the short-term (as it can be with an initial stay bonus), that when you go back to something more normal, it looks like a big step-down to the employee. Put the plans in place before you employees start to leave. Once they accept offers, it may be too late to keep them and, if you can, you will likely pay a lot more than if you put the right incentive plans in place to keep employees from looking in the first place.
Incentive plans can quickly become overly complex and burdensome. Create simple, clean incentive plans that are easily understood by management to enable management to energize the team and help them target the right activities and results. Make the metrics simple to understand – employees should be able to easily tell where they are on their performance goals. Keep the complex algorithmic formulas for your technology solutions and for the investment bankers, not your compensation plans.
from Indiana University at Bloomington in Chicago, IL, USA
We'll push for unpaid time from the seller, which should be amendable given the work can be done remotely. I think we'll also tie the seller note (i.e. 3-year payback period, but could be extended if this role cannot be successfully placed in the first year).
Many thanks.