An important part of our job when working with our LBM business owner clients is to look at all facets of business succession planning. What are the strategies and solutions, based on the business owners’ specific situation, that will produce a successful and comprehensive succession plan? One planning area that is often overlooked in the world of succession planning is retaining employees.
It’s a component that we discuss during our educational seminars and often as part of our client planning implementation. The importance of having a business transitioned in a position of strength as opposed to weakness and/or chaos should be of the utmost concern. If a succession plan works properly and the business transitions from current ownership to next generation, that sounds like a win. But what if key personnel don’t stick around after the transition? Yes, the business transitioned, but now the recipients of the business have a business in a weakened state from where it used to be. And in the case of a family business, why would you ever want to burden the next generation with that challenge?
The key ingredient to any successful business is retaining employees. This isn’t a secret. Unless a business is fully automated, without industrious employees, fat chance for sustained business success. Why then are so many business owners leaving themselves exposed if key employees depart? Some business owners are complacent and simply hope the key employees don’t leave. “Hoping” isn’t a proactive plan—especially when retaining employees in a very competitive world.
Retaining employees is doable if you’re proactive. What is the cost to hire and train new employees if/when key employees leave? What if the replacement is not as good as the employee(s) you had who are now gone? Wouldn’t it be more efficient and sensible to simply keep valuable employees?
Some privately held business owners are under the assumption to retain key employees that they need to give up ownership—even if it’s a very small percentage. This is simply not true. In fact, we often advise clients, unless it is a very unique circumstance, to not give up ownership.
There have been situations where one share of stock given to a longtime employee out of appreciation has caused conflict.
The objective is to retain the key employee(s) and if you don’t have to provide ownership, you need to ask yourself, ‘why should I?’
So, if ownership is off the table, what is the magic elixir? We’ve had success with a number of our clients utilizing ‘golden handcuffs,’ also known as non-qualified deferred compensation. Although it may sound unusual, the engine that makes the car go is cash value life insurance. This tool, unlike other options, checks all the boxes. As a result of values that grow during the time of employment of the key employee(s) and a death benefit that is there from day one, the following can be achieved:
• Retention of employee(s).
• Possible recouping by the employer of the outlay for the program and more.
• Assuring the key employee(s) should they pass away prior to the retirement age, their benefits from the program kick in and the employee(s) family will receive $500k, $1 million, or more.
• Should the employee depart prior to the agreed upon retention timeframe, the employer keeps all dollars that have accrued in the plan—which they can utilize toward an existing employee or to attract a new hire
As an example, say a lumberyard has an employee who makes $100,000. The employee is absolutely essential to the day-to-day operations. The business, however, has always been family-owned, and the business owner doesn’t want to provide ownership to non-active family members. Instead of relinquishing ownership, even a minority piece, the employer contributes, for example, $25,000 per year for 10 years (or more if they choose), into a life insurance contract, in which the key employee is the insured. The key employee is told that if they stay with the company to age 65, for example, over and above any additional company benefits, the employee will receive his full current salary of $100,000 for ten years upon retirement. And should the employee pass away before retirement, the company will pay his family $500,000. If the employee should leave, however, prior to retirement, the valuable benefit is not available or it will be provided at some reduced amount.
To demonstrate the value of a program like this to a key employee, frame the offer as a long-term bonus. If employees feel like they’re working toward something for their family— and have the option to receive cash down the line—they’re more likely to see the value of the bonus. It’s a compensation package with extra features, and if both sides hold up their end of the bargain, it’s a cost-effective method to make essential employees feel appreciated.
Leon B. Resnick is a partner in Resnick Associates, a nationally-recognized business succession, estate planning and life insurance advisory and implementation firm with offices in Kansas City and Harrisburg, Penn. Lee works with many LBM-related co-ops and their individual business owner members across the U.S. Contact Lee at firstname.lastname@example.org or 913.681.5454.