If you are an owner-managed business but want to maximise sale proceeds at completion (and avoid an earn-out structure) then you need to have bedded-in a new management team ahead of your exit to demonstrate to the buyer that they don’t require you to remain in the business to perform any managerial or sales functions to maintain profitability after completion.
Paying Your Future Management Team – A Playful Guide
Thinking about attracting a rock‑star management crew before you sell the company? It’s not just about stuffing their pockets; you’re looking at a blend of salary, equity, and some legal safety nets. Below we break down the essentials, sprinkle in a bit of fun, and keep things as human as Google would like.
1⃣ The O‑of‑the‑Box Salary
- What it does: Keeps everyone happy and productive.
- Why it matters: If you’ve been living on minimum wage with dividends as your side gig, slap on market‑rate salaries now and watch your EBITDA dip.
- Reality check: It’s honest business – higher pay = tighter profit margins.
2⃣ Fancy Equity Matters (Yes, It’s Not Just Stocks)
- Equity options: Classic shares, stock options, phantom equity – you name it.
- Phantom equity pitfalls: It’s essentially a “bonus” that taxes like income; think Income Tax + National Insurance triggers.
- Real equity perks: Shareholders can enjoy dividends before a sale and a capital gain post‑sale. Better tax treatment and a real stake in the action.
Trade‑offs With Shares
Issuing shares is a great strategy, but you must iron out a few legal wrinkles:
- Voting control: Prevent managers from flipping your day‑to‑day leadership.
- Exit timing: Have clauses that revoke or revalue shares if someone leaves early.
- Drag‑along rights: When the sale goes through, you want the team to sell along with you.
Tax‑Wise Winners
Do your homework:
3⃣ EMI Options – The Tax‑Friendly Option
- What’s an EMI? An Enterprise Management Incentives Scheme designed for smaller outfits.
- Eligibility snapshot:
- Gross assets ≤ £30m
- Fewer than 250 full‑time staff
- Employees hit the 25‑hour mark weekly
- Grab up to £250,000 value shares per person
- Why choose EMI over shares?
- Options can be set to activate only at exit.
- Shares aren’t paid for until you’re pumping in money at the sale.
- No voting headaches or minority share woes.
4⃣ The Patience Play – Let the New Team Show Their Mettle
You’ll need a warm‑up period before closing the deal. Think of it like a pre‑season – it can stretch 12–24 months, depending on the business and the buyer’s appetite. It shows prospective buyers that the new crew can run the show just as well (or better) than the current owner does.
5⃣ Final Thoughts
Before you pop the champagne on that sale, pause. Visualise the outcome you crave, map a strategic path, and build in those buffers. Once you’ve got the financial, equity, and legal toys at hand, you’ll have a management package that keeps the team motivated while protecting your charade.