Developing Next Generation Management When No Family Members Exist
A client asked us for advice in preparing his business for sale. There were no family members interested in continuing the business for the next generation. However, he was not eager to sell in the near future, just wanted to be in a position to do so over a period of years. He also wanted to be able to reduce the requirement for his own involvement in the business. He felt there would be stronger enterprise value created if the business had a solid senior management team without his participation.
BFR designed an incentive compensation plan for a young and talented manager in the company. Features of the plan included a combination of current cash (annual bonus) and deferred compensation. The value of the deferred portion behaved like phantom stock, rising or falling with the growth and profitability of the company.
The goals of the plan were to 1) create a significant value for this manager, encouraging him to stay with the company, 2) provide him with a “down payment,” enabling him to participate in trying to buy the company when the time comes, and 3) having characteristics of the plan that preclude it being included in his taxable income or requiring the company to accrue for the liability. All of these goals were met and approved by the company’s accountants. Fourteen years later, the owners have still not sold the company; the young manager provided with this plan is now President of the company.