When considering the transfer of stock to a key employee, or a group of key employees, (referred to Key group), you need to determine how much they want to be involved in the company, and the risk they are willing to take in the future of the company.
In Tier One of the purchase, the key group will purchase stock. They purchase stock from future salary, financing, or from future cash flow in the form of dividend payouts.
It wouldn’t be uncommon for the owner to want to see the purchasing employee put some skin in the game. Seeing the employee be committed allows the employer to consider future financial programs to help the employee purchase the balance of the stock under Tier 2 (the selling of the balance of the stock).
The owner in most cases will look at the bottom line what they want in the end and the financial capabilities of the key employee. Smaller employees will try to make it easier for the key person to purchase the stock. Using a bonus plan to help them buy the stock can be a very useful tool for both parties. The employer gets a tax deduction, while the employee has additional funds to purchase equity in the company.
Using lower valuation for a better cash flow when business is sold Continue reading “Key group wants to buy your business, buy do they have skin in the game?”