If you are an owner-managed business but want to maximise sale proceeds at completion (and avoid an earn-out structure) then you need to have bedded-in a new management team ahead of your exit to demonstrate to the buyer that they don’t require you to remain in the business to perform any managerial or sales functions to maintain profitability after completion.
But what sort of remuneration package will you need to offer to recruit and incentivise a management team ahead of your exit from the business?
One element of such a package, obviously, is to offer market-rate salaries, which may have a negative impact on the earnings before interest, taxes, depreciation and amortization (EBITDA) of the business if, as is the case with many businesses, the owner’s salary prior to a sale has been modest with a top-up coming in the form of dividends paid on shares.
A second element is to offer some form of equity incentivisation. This could be in the form of shares, options or phantom equity.
“Phantom equity” means little more than a bonus cash payment from the company or seller to the manager dependent on the level of sale proceeds achieved on an exit and is tax inefficient as it will be subject to Income Tax and National Insurance.
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