Compensation post transaction is another important component of the sale process of advisory firms. As a critical part of the equation for the seller, it should be negotiated alongside the broader deal terms.
If the seller is expected to continue with the buyer’s firm as an employee, reasonable compensation must be offered for their ongoing business. The seller must also realize that his or her compensation is likely to be “normalized.” In other words, the Advisor will be treated more like a regular employee than an owner who may benefit from a variety of financial benefits or distributions from their firm. Typical compensation will usually come in the form of a base salary with a performance-based bonus or a percent of overall revenue managed by the Advisor, if he/she remains in an advisory role after selling. In some cases, there may be profit sharing available above and beyond regular compensation. Buyers should have a clearly defined and transparent compensation structure for any new employee included in an acquisition.
Sellers must contemplate the comprehensive cash flow for the time period set forth by the deal terms. Total cash flow includes both compensation and consideration from the sale of the business. Therefore, the seller should focus on this collective number in their analysis. Ancillary benefits like 401(K) matches, health insurance, etc. should also be included to get the full picture. Below is an illustrative exhibit demonstrating the holistic compensation package an advisor may receive:
The key consideration for most sellers is ensuring that the cash made available from the deal and the subsequent compensation as an employee allows for the continuation of the seller’s standard of living and appropriately compensates them for their ongoing contributions to the firm. This analysis will influence the cash and equity mix the buyer requires. As we discussed in our previous blog Cash or Equity? Which Is Better
, a seller must carefully consider if equity makes the most sense for their goals.
The seller’s compensation will be different in the post-transaction world. It is important that the buyer has a clearly defined and transparent compensation model for all newly acquired employees. Adjustments, upward or downward, will affect valuation and should be viewed in totality. Total cash flow is the most relevant number for the seller to use to assess the viability of a sale from a cash flow perspective.
For more on Deal Structure see [refer to other blogs in the series]
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