Retaining Your Key Manager(s) With Golden Handcuffs.

Retaining Your Key Manager(s) With Golden Handcuffs.

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golden_handcuffsHere’s my story. Back in 2002, I ran an internship program at UBS Wealth Management for my team. The resumes came in. I reviewed them. I called the one’s that I believed would be the best fit. You know how it ended. I trained them, and shortly after they left.

From the intern’s’ perspective, they received great experience, and added an entry into their resume. From my perspective, I grew tired of running a school.

Music retailers may not be in the internship business, but they must figure out a way to retain their key managers. Let’s face it. It’s expensive to identify and train a new manager.

According to Center for American Progress, the typical cost of losing a manager earning up to $75,000 is  20% of salary or $15,000.

I was speaking with a music retailer owner who told me that after 20 years, she lost her key manager, who decided at the age of 50 to form a rock band. How do you calculate the dollar value of having to postpone retirement and begin training a new manager?  

This is not funny business. If you are the exiting owner, who lacks  a ready market to sell your business to a third party, and plan on transferring it to an insider, you need your key manager(s) to keep the cash flow going during your retirement. This is equally true even if your key manager is your son or daughter. There’s nothing more important than to identify, train, motivate and retain your successor(s). You don’t want to have to take back the key to your store because of lack of payments once you leave. because they can no longer afford to send out your monthly checks.

Let’s assume that you have identified and fully trained your key manager(s). You have two challenges. Retaining the manager, and helping the manager come up with a down payment to buy you out.

A sensible retention strategy includes “vesting.” What’s vesting? Vesting refers to the process by which an employee earns a specific benefit over time. For example, you can create a vesting agreement when you retire. Unless your key manager sticks around for the long ride, they potentially leave a meaningful amount of cash on the table.

For example you can enter into an arrangement with your key manager, which is funded by a life insurance policy. The mutually agreed upon  endorsement can impose a vesting schedule and restrict the employee’s access to the policy cash value in the life insurance policy until retirement or per the vesting schedule.

This is the way a non-qualified bonus plan works, and it is referred as Section 162 of the Internal Revenue Code. In this section it states that an employer may deduct certain expenses- including salary and other compensation-that are ordinary and necessary business expenses.

Here’s what you would say to your key manager(s).

“Joe and Jane. I really appreciate your commitment to our business. What I would like to do is help you build a future nest egg which you could use as a down payment on the business when I’m ready to retire in about 10 years. So I will be giving you a “double bonus” each year which will pay for a cash value life insurance policy which you will own. When it’s time for me to exit, the cash value can be used as part payment to purchase my shares.”

I’m keeping this simple so you get the idea. This of course would be worked out with an attorney, perhaps integrated into a buy/sell agreement and an employee agreement.

Still the concept is simple. Premiums to the employee(s) are reportable as income but the actual policy cash values will grow tax deferred and the bonus paid to your employee(s) to pay for the premium is tax deductible.

Questions? Schedule a call with me.

This content is to educate. We do not give tax and legal advice.
You should consult with appropriate counsel or other advisors on all matters pertaining to legal,
tax or accounting obligations and requirements.

Written by Jaimie Blackman

Jaimie Blackman

Jaimie Blackman — a former music educator & retailer— is a Certified Wealth Strategist & Succession Planner. Jaimie helps business owners maximize the value of their company through education & coaching. He is a frequent speaker at the National Association of Music Merchants, (NAMM) Idea Center and has spoken at Yamaha’s succession advantage.

As a financial literacy educator he has taught at New York University and has lectured at the 92nd Street Y, Marymount Manhattan College and CUNY.

His column is published in The Music & Sound Retailer and contributes to NAMM U online, as well as other industry trade magazines.

Jaimie is CEO of Jaimie Blackman & Company, President of BH Wealth Management, and Creator of MoneyCapsules® and the Sound of Money®.

To register for Jaimie’s live webinars, or to subscribe to his podcasts, visit jaimieblackman.com.

The purpose of this post is to educate. Our content should not be construed as advice. If legal, tax or other advice is required by the readers, professional advice should be sought.

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