What's a "Stay Bonus" and How Is It Helpful?

Simply put, a Stay Bonus is an amount of money paid to “key” and/or “important” employees to prevent them from leaving when an owner either voluntarily (i.e, sale to third-party) or involuntarily (death or disability) exits the business.

Lifetime Stay Bonus example: An owner is approached with an attractive offer by a potential Private Equity buyer. The selling owner is excited about the offer and wants to move ahead with the proposed deal. As the buyer’s due diligence process is implemented, the key employees, who have not been incented to remain during transition periods, are all getting “nervous” regarding the uncertainty of their future with the business. One actually leaves and the others are “looking around”. If the selling owner had implemented a Stay Bonus prior to a potential sale it could alleviate this potential deal-killer.

Stay Bonus Upon Death example: In a meeting with a client and her estate planning attorney, the attorney was recounting the story of a business owner who recently passed away and how his passing impacted the family and business. Of course it was emotionally agonizing for the owner’s spouse and family, but what compounded the pain of the situation was there nothing in place to keep key employees in place to continue to run the business. Hence, key employees left and so did customers and the value of the business (which the owner’s wife was depending on) decreased significantly. A bonus that had been planned and structured to retain key employees during this time would have saved the family, the employees, and the customers from much pain and uncertainty.

Key considerations:

  • Plans designed for a short period of time must provide a meaningful payout in a short period of time if the business is sold.

  • Keeping key employees is almost always necessary for the business to be sold at a maximum sale price.

  • The benefit should be greater when the business is actually sold while more affordable when a potential sale went through due diligence but did not sell.

  • Key employees are often asked to do even more during transition periods than what there regular job description calls for.

  • As all cash sales to third-parties are the exception, owners are often exposed to post-sale financial risk that can be increased with departing or unmotivated key employees.

Contact us if you need to give further and serious consideration to implementation of a Stay Bonus Plan.

Sole Ownership and Planning for The Unexpected

A sole owner of a business who has a spouse and/or family has not a few key planning issues that need to be addressed before it’s too late.  “Too late” being the unexpected events of death or permanent incapacity or disability.  To illustrate, let’s use the following story that is based on real life events…

John Doe owned a very successful commercial real estate development firm.  He regularly met with his Business Advisor and they “game planned” aggressive growth strategies that were proving to be successful in building the value of the business.  To the point where John was seriously considering expansion into other geographic areas.  Life was good and the business was growing rapidly!

One evening after meeting with his advisor, John experienced a sudden heart attack and died later in the hospital.  At age 55 he still had family financial responsibilities, yet he had not been as thorough in his personal and family financial planning as he had been in planning to build the business.  It was time of extreme grief and mourning as well as uncertainty for Jane…

o   She didn’t know what to do next.

o   She didn’t know if John’s salary would, or could, continue.

o   Employees and customers started to leave as there was not a plan, and so the business became less valuable and sellable.  This was problematic as Jane was dependent on the sale value of the business as John had limited life insurance and investable assets.

o   Due to the high level of uncertainty, there was a lack of peace and stability for Jane and for everyone who was at all dependent on the business.

There were too many things that John didn’t do, and should have been done, to mention in a short blog post. So, highlighted here are just a few (not an exhaustive list) of the key planning solutions that, if John had put in place, would have helped in minimizing the agony that Jane and the family experienced…

 §  Clear written instructions that were aligned with updated and adequate estate planning documents as to how to continue the business.

§  A personal financial plan that included a cash flow analysis of how much money Jane would need both short-term and long-term in the event of John’s early death. 

§  A written resolution for Jane to continue to receive John’s salary until insurance proceeds were received.

§  Plans for the business bank line of credit to continue uninterrupted.

§  A current and adequate personal life insurance program.

§  Key person life insurance on John that would have provided needed liquidity for the business to provide key employee stay bonuses, etc.

Due to the importance of Business Continuity planning for a business owner and their family and business, we provide on a complimentary basis the following:  1) Business Continuity Instructions document that is a fillable PDF.  2) One-hour Business Continuity Instructions consultation.  Please contact us and take action today.

What Happens When a Sole Proprietor Dies?

In that, a sole proprietorship is entirely linked to the founder/owner, at the death of that sole proprietor the business cannot continue in its current form.  The business will either need to be shut down or the tangible and non-tangible assets sold to another individual or entity pursuant to the last will and testament.

A few of the potential challenges realized at death would include the business immediately losing value as the business is directly linked to the sole proprietor, valuation of the business assets, and enough liquidity so that the estate would not be required to sell assets at fire-sale prices in order to settle the estate.  Something that is often not fully considered by sole proprietors and their heirs is that, as in life, in death, there is not a separation of personal and business assets.  So,  the estate may be required to sell business assets in the same way they would personal assets in order to pay estate settlement costs.  Another challenge that often arises is the expressed desire of the deceased owner to sell the business assets at death to a family member, but the family member, who was hoping to eventually own the business, does not have the needed liquidity at the time to purchase the business.  And, of course, all of this, and more become even more challenging for survivors if the owner dies intestate, or without a last will and testament.  So, there are not a few challenges for a sole proprietor in planning the eventual distribution or transfer of their business interest at death.

If a sole proprietor has wishes or goals regarding the distribution of their business assets at death, and/or values-based goals such as family harmony, a well-thought-out written estate plan is imperative.  The owner may also need to give serious consideration to issues such as changing their business structure, providing additional liquidity at death, and the creation of a buy-sell agreement.  And, as it is true with all strategic planning, you cannot get started soon enough.

Consider contacting a qualified estate planning attorney for a review of your plan, and if we can be of service in helping you think through your goals and desires please contact us.