Whenever there is a change in the ownership of a business, if the buyer is willing to maintain the management team after close, it is advisable to implement new contractual dynamics to motivate the management team with the change and retain it.
Whenever a buyer positively values the management of a business that it intends to acquire, it usually wishes the management team to continue managing the business after the acquisition.
In order to achieve this, it is advisable that simultaneously to the start of negotiations with the seller or shortly after, the buyer also starts conversations with the management team with the utmost dedication and sensitivity. The buyer must learn the professional and personal situation of the management team, try to align as much as possible their mutual interests, identify and overcome any existing difficulties with the current (and leaving) owner of the business and, ultimately, if possible, improve the personal and contractual relationships between the owner of the business and its management team.
With this information, the buyer should internally evaluate what to offer the management team in each case and what to change with respect to the situation existing prior to the acquisition.
In general, the buyer ends up offering improvements to the then existing contractual terms and conditions, which may not only result in salary increases (for ex: attribution or distribution of responsibilities). However, most notably, the buyer should consider offering a retention plan in the form of the granting of special bonuses or rights over the company’s shares. Such benefits may be conditioned upon (a) the achievement, in an agreed period of time, of certain performance indicators of the business or (b) to the fact that the manager continues to perform services for the business in a given period of time, or a combination of both. In addition, if the relationship with the management team is of a commercial nature (not a labour relationship), penalties may generally be included in the event that the desired retention period is not complied with by the manager.
In our opinion, the contractual improvements and retention plans are very useful instruments to motivate the management team with the change, encourage retention and ensure good management post-acquisition. That is as long as the objectives are reasonably achievable and the rewards are satisfactory enough. However, we do not believe that is the case with penalties. The threat of applying penalties may serve to guarantee the retention but does not serve for good coexistence nor for truly recovering the damage suffered by the Buyer if the manager leaves prior to the end of the desired retention period.
With a good retention plan agreed that rightfully addresses each of the managers’ personal and professional expectations, the buyer must be able to guarantee the retention of the management team for a reasonable period after the formalisation of the acquisition.