M&A Insights – The importance of retaining key staff during a sale process

March 10, 2017

For many shareholders, the months and years leading up to an exit may be spent taking a conscious step back from the ‘day-to-day’ running of their business.  How this manifests itself can take many forms, from reducing the amount of face-time in the office through to actively migrating client relationships over to key members of the management team.  You’d be hard pushed to find a corporate finance adviser who would encourage the opposite.  Overreliance on key shareholders can lead to value destruction, an increase the likelihood of retained or deferred consideration being employed by a buyer, and can result in the shareholder being required to retain much more of a role post-transaction than is desirable.


So, let’s work on the assumption that you’ve successfully extricated yourself from the day-to-day goings on of the business.  This raises an often talked about, and an often overlooked topic in sell-side corporate finance; how do I retain key employees during a sale process?


The team here recently held a session where we reviewed a number of our recent successful transactions to identify common themes with those businesses that have successfully been sold or funded.  It’s fair to say that most, if not all of the successful transactions we see involve (admittedly, to varying extents) a well incentivised and engaged management team who have a sense of ownership of the business.


Delving into why this is so, and how this can be achieved; the most important area to be addressed is the alignment of objectives.  We are looking to avoid what are known as ‘agency’ issues (i.e. a conflict of interest between the shareholder and manager).  It is imperative to align objectives between the two camps.  This alignment can take a number of forms, and be driven through various incentive structures.  The aim is to create a win-win situation where an increase in value to a shareholder means, to as great an extent possible, the same for a manager.


One of the most frequent examples of management incentivisation, is providing management with the option to acquire an equity participation in the business.  On the assumption that the business is eligible for an approved scheme, such as Enterprise Management Incentives (EMI), the tax treatment from the perspective of the manager can be highly attractive.  The potential to be subject to Entrepreneurs Relief means that the manager’s capital gain could be taxed at just 10% – a marked difference if the gain were to be taxed at income rates.


In some circumstances, management may not be able to participate in share option schemes for practical or timing reasons, for example when a key management member joins close to an exit.  Instruments such as flowering shares can be useful in instances such as these.  Clearly where management incentives are linked to equity value it provides a direct correlation between what benefits a shareholder, and what benefits a manager.  A slightly cruder option is to provide cash bonuses to management and employees in the event of a successful transaction.  As previously alluded to, the income tax treatment here is less attractive from the manager’s perspective.  When considering what would drive the quantum of the bonus, again, focus on what will align the shareholders’ and managers’ objectives.


We look to ensure that the management teams within our clients’ business are well empowered, incentivised, and (where possible) involved in our process.  It improves the likelihood of a successful completion, can be value accretive, and often improves deal structure.

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