As we approach the new year and reflect on the radical changes occurring over the last 18 months, recruiting top talent and retaining key employees remains a significant challenge for many businesses. For that reason, many business owners are exploring additional tools and options to attract new talent and keep key employees.
One of these tools is a phantom equity plan. A phantom equity plan offers a business significant flexibility while at the same time giving an employee something of value that is intrinsically tied to the growth of the business. Phantom equity plans provide an employee some, but not all, of the benefits of being an equity holder without the complexity, additional documentation, and voting rights typically associated with equity ownership. These benefits may include: (1) receiving distributions or dividends when such benefits are paid to equity holders, (2) payments upon a sale of the company, or (3) payments upon retirement or separation of employment.
In exchange for providing an employee these added benefits, businesses realize several advantages. First, an employee feels rewarded when they are offered phantom equity, while at the same time creatively aligning an employee’s financial goals with the business’s success. Second, the terms of a phantom equity plan can be carefully crafted to ensure an employee continues working for a business before earning any financial benefit from a phantom equity plan. Finally, businesses can require that an employee execute updated non-compete and non-solicitation covenants that will be more defensible because the employee is receiving a significant added value (e.g., potential payments under the phantom equity plan) in exchange for signing the restrictive covenants.
While these programs are “simpler” by nature, businesses must still prepare these plans and administer them in compliance with the IRS code and other applicable statutes and regulations. The attorneys at Levin Ginsburg can help design, implement, and prepare a phantom equity plan that is a good fit for your business to allow you to recruit top talent and retain key employees. For additional help navigating these issues, feel free to contact Walker R. Lawrence, a partner in the employment law practice at Levin Ginsburg, at email@example.com, or (312) 368-0110.
John Smith owned a small manufacturing business. One day he received a call from one of his competitors who said he was interested in buying John’s business. John was now 75 and this seemed like the perfect opportunity for him to retire and have that “nest egg” for him live comfortably in retirement.
John met with the buyer and they discussed, in general, John’s business. After the meeting, the buyer presented a letter of intent to John, which proposed a purchase price of $10,000,000, subject to the buyer’s due diligence investigation of John’s business. John felt pleased with the letter of intent and signed and returned it to the buyer.
During a long and protracted (and quite thorough) due diligence, the buyer and his accountants and lawyers examined the business and its books and records. Based upon their examination, they advised the buyer of various legal and financial risks that John’s business was exposed to and which could become issues that the buyer would have to face.
John could not produce all of his current contracts with his customers. The contracts which he had contained provisions which could cause the contracts to be terminated upon a sale of the business or a transfer of the ownership of the business. Their key employees had no employment agreements and could compete with the business once they terminated employment. The leases for the business’s facilities could not be assigned.
Despite the issues with the business, the buyer was still interested in purchasing the business. The bad news was that the revised purchase price was to be $8,500,000 with a significant portion to be held in escrow pending resolution of various legal issues.
The above scenario is very common with small business owners. Bigger companies who regularly acquire smaller companies are “professionals” in the acquisition business. They know exactly what to look for and they know how to “string the seller along” until they present a reduced offer which most sellers feel they have to accept.
If you are thinking of selling your business, make sure that your business is ready to be sold and that you have copies of all contracts and leases and that you understand what they provide and how they will be affected upon a sale. Have written employment agreements with all your “key employees.” Pay attention to your inventory, your accounts receivable and other assets which “drive the sales price.” Protect your intellectual property by obtaining patents, to the extent applicable, and trademarks.
If you are considering selling your business and would like a “legal check-up,” please do not hesitate to contact:
Morris Saunders at:
firstname.lastname@example.org or 312-368-0100.