Ensure company incentive plans enable a future successful company sale
Many private company owners and CEOs reward some, or all, of their employees with a monthly, quarterly or annual incentive plan. If you offer some sort of employee incentive, ask yourself, do my employees that have an incentive plan know what the plan is based on, what they need to do in order to get a maximum payout?
Too often the answer to this question is No. It’s because ownership is nice to have an incentive plan in place but it’s purely subjective so the employees don’t know what actions or focus they should have in order to achieve it. This is a missed opportunity by ownership to get employee actions and behaviors aligned with what it takes to drive improvements in the business and create short and long term value in the business. It’s also a missed opportunity to ensure readiness to one day show a potential acquirer that your incentive plan is well though through and is helping drive progress in your company.
The ultimate reason, and benefit of putting an incentive plan in place, is to help drive desired behaviors by participants. To do this, the plan should be linked to what the company is looking to accomplish strategically, something more objective than purely subjective. Then, when the day comes that you want to sell your business to a third party, you’ll be able to show them that your company has many good disciplines in place, including an effective incentive plan for driving desired employee behaviors. As part of an acquirer’s due diligence, they will assess whether your incentive plans are well thought through and linked to the strategy of the business because this is a plan they will inherit. If the plan is well designed, it will help underpin their interest and excitement for acquiring your business. If not, it could give them pause due to the risk they might have to incur by addressing a gap in your incentive plan as they make changes they believe are needed. When an acquirer sees risk in doing a transaction, it gets reflected in a lower purchase price and/or a different deal structure. Certainly, any gap in your employee incentive plan alone isn’t going to deter the quality of their offer to acquire your business, but if other factors also arise during their due diligence, collectively these could impact their offer.
Ensure therefore that you are getting the near-term benefit of the money you are paying employees for incentive plans and in doing so, you’ll be getting ready to check one more box for a future acquirer as they will look to see that you have good disciplines in place related to your employee compensation. Get maximum value from the incentive plans you provide your employees and help enable the future value of your business in the eyes of an acquirer.
