One of the main risk factors in business acquisitions is the (high) dependence on the selling DGA. Especially within SMEs, the expression "the guy (or gal) makes the tent" applies. This is because the DGA is usually the driving force within the company, both strategically and operationally. Consequently, from the buyers' perspective, the question is often (rightly) asked, "To what extent will the company's performance be affected after any departure of the DGA?"
If the answer to the above question is negative, implying a high level of dependency, this has a depressing effect on the value of the company and vice versa. As a result, the company has a higher risk profile, which means that a (potential) investor wishes to receive a higher return on his investment and arrives at a lower equity valuation. In order to lower the risk profile, it is important to make yourself as selling DGA 'redundant' as much as possible. To realize this, there are several steps you can take, such as delegating authority and (management) tasks, transferring knowledge and contacts to employees and introducing structured management reports and monitoring KPIs. In order for the aforementioned steps to be successful and given the current shortage on the labor market, another important and effective instrument is to bind the management team or the important (key) employees to the company.
Start making yourself "redundant" in good time
Bind employees
To bind key employees to the company for the long term, share-related rewards are regularly used. Share-related rewards can be in cash or in shares. Examples of cash rewards include a "Phantom Stock Plan" and "Stock Appreciation Rights. In both cases, employees do not become shareholders, but receive financial compensation or remuneration. Some examples of equity compensation (employee participation) include employee stock options, a stock purchase plan, "Restricted Stock" and "Deferred Stock. In the above-mentioned examples, employees acquire (the right to) shares in the company. An essential advantage of employee participation is that through co-ownership, the interests of the employee are aligned with those of you as a DGA. We also see in business transfers, often when buying from private equity, that part of the shareholding (for example 5%) is reserved for the management team or (key) employees.
Determining the most appropriate instrument for you to bind (key) employees to the company for the long term depends on various factors. Among other things, a possible (future) company transfer, such as change of ownership clauses, should be taken into account. In addition, the various (complex) tax implications of the instrument should also be identified.
Advice
Our advice: Start early with making yourself 'redundant' as selling DGA and investigate the various possibilities to bind (key) employees to your company for the long term. In doing so, ensure that you are provided with sound advice from both an M&A and tax perspective.
