A: It depends.

Here is one example but note that every situation is unique!

The owner wants to retire and leave his business in good hands. He has been developing a strong “number two” (let’s call him Jim) over the past three years. Jim is a talented manager capable of handling continued growth as the company grows. The employees like him and he is great with clients. The existing production teams already report to him.

Jim’s current compensation is $150k plus an annual bonus of up to $50k, depending on a formula the company tracks that includes targets for gross margin, customer and employee satisfaction scores.

Since the sale of the company will allow some of the executive and administrative functions that the owner currently handles to move off his plate the buyer’s existing executive team (financing, HR, legal, insurance, IT), Jim would be an ideal branch manager for the buyer. He will become a part of a larger operation and have continued opportunities for his own career growth.

The owner wanted to make sure Jim is committed to staying with the buyer for at least two years. We developed a retention bonus plan to create an incentive for Jim to stay with the new company. That plan will replace his existing bonus plan.

Here’s how it works:

Jim would have received $150k in 2020 and a bonus of up to $50k in February of 2021 after the books have closed for the 2020 year.
The sale closing date will be as of January 1, 2021.

Jim will have received the same $150k in salary for 2020, but in addition, he will receive an additional bonus of $25k at the end of 2020 from the seller that is intended to reward him for the extra efforts he had to undergo in helping to get the deal closed. (He received his 2019 bonus in February of 2020 for 2019 performance.)

For 2021, Jim will receive base compensation of $160k, a retention bonus of $25k paid in 2021 similar to the closing bonus as a prior year plus a performance bonus of up to $50k based on targets set and earned in 2020, and, in addition, would be earning towards a retention bonus of up to $100k payable in February of 2022, based on performance targets set and measured from January 2021 through December 31, 2021, This bonus would be payable in February of 2022.

For 2022, Jim will receive base compensation of $1The plan is that he will receive a significant, but not He would receive a bonus when the transition occurs, and an additional bonus at the end of the first year after closing and the second year after closing. Ideally, this would be paid partially by the Seller at closing and a portion would be shared between buyer and seller for the balance of payments.
Nothing has been said to on the $, other than a minimum of 25K if in 2019; then if after this first year, it would be substantially more, likely in the 200K range.

The agreement states he will get 50% of the money at the sale, the last 50% 13 months after the sale – designed to keep him on board while I do my 12 months with a buyer.

As always, if you would like to discuss this topic, your business valuation, your value drivers, buying or selling, feel free to reach out to me at 224-688-8838 or email me [email protected].

Alison Hoffman

has more than 25 years of experience in strategy, operations, mergers and acquisitions and delivering business-to-business client solutions. Her areas of expertise include managing operations for profitable growth, organizational design and strategy activation. She brings a wealth of experience through her work in evaluating, valuing and purchasing over 30 companies, leading company-wide cultural and business integration projects and consolidating best practices among business processes and corresponding computing systems. Read Full Bio