Why Key Employee Retention Enhances Business Value
Losing Great Employees Can Spell Disaster
This MTD exclusive was provided by Michael McGregor, partner at Focus Investment Banking (www.focusbankers.com/automotive/tire-and-service.) He advises and assists tire dealers on mergers and acquisitions.
The tire industry is different from other businesses in that people who know the nuances of it and the processes within it tend to operate more profitable businesses.
You can fake it for a bit. I certainly did at first when I ran tire stores. But nothing beats the thousands of hours of deliberate study and practice that the best people have applied to get to where they are today.
Experienced, key people like that are worth their weight in gold and tire dealers need to do all they can to keep them.
I’ve seen what can happen when key employees leave. Organizations can tumble to unprofitability in a few short years because a new leader with the wrong experience takes a thriving business and changes it just to try something radically new — even if it makes no sense.
While retaining all employees in a tight labor market is important, my view is that the real key employees in any tire-related business might be:
a) The person actually running the whole show — the operating CEO, president or vice president of operations, and;
b) Individual location managers — whether retail, commercial or wholesale.
If you are an absentee owner or an owner who has stepped aside to let someone manage the day-to-day of your dealership, retaining these key people will enhance your lifestyle, your business’ profitability and in turn, your business’ value. Conversely, losing a key operating executive and key location managers can turn profitable businesses into losers fast. Developing retention programs specifically for these two categories of employees makes a lot of sense.
It makes even more sense particularly now with new private equity groups entering the industry. We talk with private equity groups every week that want to acquire new “platform” investments in the tire business. Your most senior key employees might be ideal leaders for these platforms if you don’t have them locked down. And don’t think that they won’t try poaching your best location managers to fix the “dogs” in their groups too.
Most private equity platforms have an advantage in that everyone knows at some point that there is going to be an exit or “liquidity event.” Private equity likes having key employees share in an equity pool to keep everyone “rowing” towards that exit in five years.
But if you own Lou’s Tire World with eight stores and you’re not planning on selling anytime soon, how can you relax in your condo in Cabo while keeping your key operators and managers motivated, loyal and happy that they’re creating all that wealth for you? You can achieve this with some financial retention tools.
I’m not talking about base pay, standard benefits or working conditions. You have to be competitive with pay and benefits or every employee can be easily poached. That’s the baseline. Your key people want a chance at being wealthy like you, too.
Financial retention tools are things like phantom stock, stock appreciation rights (SARs) and restricted or executive bonus plans funded annually and tied to cash value life insurance plans that grow on a tax-deferred basis.
The idea is to tie key employees and managers to a five-to10-year retention plan so you can sleep better at night. It’s always better to get a retention plan for key employees in place before they come looking for it. If they have already discussed retention plans with you and nothing’s happened, their anxiety is building and you may lose them before you know it.
A key factor in crafting any retention plan is whether or not you are planning an exit within a reasonable time frame or keeping the business in the family. With a potential exit on the horizon, you can motivate key employees with actual stock ownership (not my favorite method) or pseudo-ownership with phantom stock and SARs so they can benefit along with you when there is an exit.
Just promising a bonus at the time of sale won’t cut it for several reasons. First, it’s taxed at personal tax rates, not long-term capital gains rates, and second, it’s just too vague. An effective and flexible method for retaining key senior employees and managers is with employer-sponsored life insurance-funded plans. In these, the employer pays an annual bonus to a key employee, who then uses it to pay the premium on a life insurance policy. The employer can place conditions on the plan, like requiring that the employee stay for five years before being entitled to the benefits.
Why life insurance? Life insurance-funded plans are flexible, build value on a cash-deferred basis and also allow you to deduct the cost of premiums off your P&L.
It always pays to seek out qualified professionals who can help you implement employee retention plans. Sharing a little wealth to retain key employees will make your life easier and help you build a more valuable company.