Solutions for Flight Risk Employees

by

Joan M. Ridley, CEPA, CBI, CFP^®

"He's a loyal employee. Been with me for 20 years. He would never leave". How many times have we heard this - and the next week that same loyal employee is gone and he's taken customers, your customers, with him. Don't assume that you understand your employee's thinking and motivations.

Why key employees leave

They want to own their own business
A competitor offers them an equity or legal stake
Their needs aren't being met in your employ
Their needs and motivations have changed
They hoped for, or were promised, a stake in your business but it never materialized
They think they are the reason for your company's success so they should be a shareholder
They see your company's customers as his own customers
They sense that you are selling and they want or deserve a piece of the action

Talk about bad timing

What if you are preparing to, or in the midst of, putting your business in play and your employee will not agree to anything until you agree to share your sales proceeds with him. Now the salability of your business is threatened, not to mention your own personal financial security. Often, business owners don't give any serious thought to this issue until they are thinking about selling. What if you are negotiating with a buyer to sell your company and the buyer won't go forward unless your employee signs a document with non-compete and non-solicitation provisions.

So when is the best time to take steps to deal with this issue? The employment agreement with non-competition and non-solicitation provisions ought to be signed when you hire the employee. The chief reason is so that you will be prepared for the unexpected departure of the employee, the employment offer satisfies the consideration requirement, and you are prepared should the ideal unsolicited buyer appear.

Let's take this one step further

There's one more aspect to this conversation. Insuring that your employee has signed an agreement with non-compete and non-solicitation provisions is a good start. But what if your business has limited, or, dare I say, almost no value, without that employee. Those two provisions are not enough. From a buyer's viewpoint, your business might be totally unattractive unless that employee transfers with the business along with your customers. You cannot guarantee to the buyer that the employee will remain after ownership transition However, an employee retention plan will increase the likelihood that he will.

Importance of employee retention post ownership transition

There are 2 chief reasons that employee retention post-ownership transition is so important:

Business cash flow is more predictable for the buyer
The seller's sales proceeds might be tied to customer retention post-ownership transition

Retention agreement opportunities

Phantom stock, stock appreciation rights, and stay bonus are three methods that might be viable strategies. Although phantom stock or stock appreciation rights might provide seller protection, depending on the plan provisions, these strategies might or might not be appropriate.

Some considerations are:

Company size
Prognosis for increase in company value
Owner's tolerance for legal fees, regulatory issues, and complicated agreements
Discretionary cash flow to fund any agreement
How soon the business owner hopes or plans to transition ownership

What about a stay bonus

The stay bonus is ideal if you are already planning to put your business in play in the next few years or sooner. For instance, if you plan to be out of your business within 3 years, a stay bonus is more feasible because the cash bonus will likely be paid from your sales proceeds rather than from another source such as insurance cash value. With a stay bonus, the employee would receive a bonus, usually in cash, equal to a stated amount, if he remains for a stated period of time after ownership transition. A typical bonus amount would be 6 months' or 12 months' salary, in addition to his then current compensation. A typical period of time would be 6 months or 12 months after ownership transition. The bonus could be split up so that he would receive: a modest amount when he signs the agreement; an additional modest amount when the company changes hands; and the majority of the bonus, such as 90%, when he has fulfilled the retention requirement. The retention requirement ideally would include compliance with the non-compete and non-solicitation. You might consider also including a performance requirement that would insure that the employee would continue to service the transferred customers as he always has. This is especially important if the seller's proceeds will depend on customer retention. However, this particular provision is tricky to draft and most attorneys will discourage it. If there is any concern that the employee would take his bonus and start a competing business or acquire an interest in a competitor, you could make a distinction between when he has earned the bonus and when he actually receives it.

Who should draft the documents

Interview a few attorneys who practice employee relations before retaining one to draft these documents. Employment law is a land mine and any misstep on your part could cost you plenty, far more than the attorney's fees you sought to save. Interview as many as you need to in order to be sure that the one you retain not only understands what you are wanting to accomplish, but one who actually drafts these types of documents on a regular basis and who knows what will work and what will not. It would also be helpful if your attorney is familiar with ownership transition issues and has had dealings with mergers and acquisition professionals. The mergers and acquisitions professionals have their own take on what it's like to try to negotiate a transaction at the same time that an employee has one foot out the door while he is holding out his palm at the same time.

Call us today to discover how we can help you at 214-692-9192.

Joan M. Ridley is President of Business Wealth Solutions. She is a business coach who helps business owners create company sustainability in preparation for management or ownership transition. She is a Certified Business Intermediary, Certified Business Exit Planner, and a Certified Financial Planner^™. In 2013 she received the first Excellence in Exit Planning Award conferred by the Exit Planning Institute for her pioneering contribution to this new discipline. She is the Founder of the North Texas Chapter of The Exit Planning Institute. Call 214-692-9192 and visit www.bwsllc.net.