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Value Creation Blog

How to Fund Your Stay Bonus

Posted by Josh Patrick

Stay Bonus Transition PlanningA stay bonus is extra compensation you pay a key employee if one of three triggering events happens.  Whether you transfer ownership of the business, die, or become disabled a stay bonus can be key in helping your business retain its value.

When I sold my first company having a stay bonus helped me get a significant additional sum.  Making sure our key people stayed with the new owner for six months to a year meant the difference between a successful sale and one that fell apart.

A comment I often hear about stay bonuses is they’re a great idea, but how do I make sure the money is available if I need it.  The answer to this question is different for every business.  I’ll outline how I’ve used stay bonuses in companies I’ve been involved in.

If I sell the businessIf you sell the business you will receive a certain amount of money from the sale.  The new owner will likely not be very interested in having you stay on.  They will want your key people for at least a long enough period for the new owners to learn the details of what makes your business tick.

The bad news for you is that you will be funding the stay bonus out of the proceeds you get from your business sale.  The good news is that you will likely be able to negotiate a better price for the business with more cash up front.  You’ll be able to use a portion of that extra money to pay your employees to stick around for at least a few months.

A stay bonus shows a buyer that you’ve thought about what will happen and how the new owner will take over your business.  When I went through negotiations as either a buyer or seller a stay bonus always made a big difference in how smoothly the transaction went.

What if I’m disabled?  I believe this is the toughest of the questions to answer.  You can buy disability insurance that pays for the ongoing expenses of running your company.  This insurance is usually very expensive and it’s hard to collect once you become disabled.

Most of the time if you are disabled, you will find some way to keep current with what’s going on at work.  Unless your disability is so serious that you’re likely to die you will eventually make your way back to work at your company.

The question you should answer is how can I fund my company and make it worthwhile for my key people to stick around if I become disabled.  I suggest that in this case you establish a savings account that can be used as bonus payments for those key people who help you make it through a disability. 

Although this is not the least expensive path it will provide needed cash to help pay bonuses that might be very important to keep your company going.

What happens if I die?  This is the easiest part of the stay bonus conundrum.  You will want to purchase a life insurance policy on yourself that will fund payments of stay bonuses for people who stay with your business and help your family salvage whatever value your business can provide.

It’s important to understand that your business is not likely to survive if you die.  At the same time, there is potential for salvage value that key people can help harvest for your family.

If you die, you should have life insurance policies both in the business and outside the business.  The life policies in the business should only be used to fund stay bonus obligations.  The life policies outside the company should be used to make sure your family is economically OK if you’re not around anymore.

I’ve found stay bonuses have been very valuable in various parts of my business life.  My guess is they would be in yours also.

We’ve put together a case study on how to retain your key people by using a Stay Bonus.  Learn how the Aardvark family has used the stay bonus in their family to keep key people around at critical times in their business.  To get this case study click on the button below.

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Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

Topics: for business owners, exit planning, business exit planning, stay bonus

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