This question comes up often when someone is closing on the sale of their business. Should I include the cost of employee bonuses in the sale agreement?
There are two important considerations here. One is whether the bonus is part of the employee compensation package. If the bonus is based on performance, sales, or some other measurable metric, and has been understood (formally or informally) since the beginning of the year, the answer is yes. Pay the bonus. It’s what you agreed to. You’d be entitled to prorate it if you close in late October, say, instead of December 31, but it’s money that is owed to the staff.
The same goes for Paid Time Off. If an employee currently earns three weeks of vacation, for example, and has only taken one week by the time the sale closes, you should pay out those remaining hours to staff members. That gives the new owner a chance to start the year fresh.
The bonus question becomes less clear when the bonuses are not part of the employment agreement. Many companies base holiday bonuses on how well the company did that year, which sometimes means there is no bonus at all. In those cases, the payouts to employees are more a matter of building goodwill, which is always a good idea, both for the departing owner and the new one.
If you didn’t do anything at the end of the year, and then informed the staff that the company is under new ownership as of tomorrow (as brokers recommend), some of your staff will likely be surprised, and perhaps even distraught. If they perceive the lack of end of the year bonuses to be a way for you to make more money from the sale, they’ll also be resentful. It’s not a great way for the new owner to start off.
That’s why some sellers and buyers spend time considering and cooperating on staff bonuses. Staff with long tenure or who have played key roles in operating the company deserve recognition for their contribution to the company’s success. Some bonuses may be tied to staying with the company for a certain period; it’s one way for the new owner to provide continuity internally and for customers.
A “stay” bonus may be paid out in increments over the first year to help motivate staff to remain in the company and keep their performance at a high level. It’s also a way to lessen job insecurity for workers you want to retain. You can include a written severance agreement for managers so they know they’ll be compensated if the new owner makes changes in the company’s structure.
If you’re working with your buyer on a smooth transition, bonuses for your best workers should be part of the conversation. It’s an effective way to show your appreciation for their years of service, and a way to soften the impact of learning about the company sale after the fact. It’s also a method to compensate key employees for the extra work they may have to take on during the transition: training, customer communications, or some of the previous owner’s duties until the new owner gets up to speed.
Paying out bonuses is a powerful way to show your staff that their efforts have been noted and rewarded. That’s always a good idea – and good business.
