Navigating an ownership change can be a turbulent period for any business. Maintaining business continuity and employee morale is crucial to the transition’s success. 2023 saw a decline in North American food & beverage M&A transaction activity due to high interest rates and resulting buy-side hesitancy, which underscored the importance of post-transaction planning and talent retention.
3P Partners supplies talent to more than 200 food and beverage manufacturers and large-scale farming businesses in the US, Australia, and New Zealand. Our team interviewed some of our clients who have successfully retained key talent and minimized operational disruption during ownership transitions. This article features insights from the following:
- Doug Circle, President and CEO of Circle Vision, a commercial and agricultural real estate business.
- Darryl Brooker, CEO of Latitude Wines, a private equity backed beverage logistics business.
- John Dahlgren, VP of Talent at SBJ Capital, a private equity firm with ~$600mm of capital under management in lower middle market consumer, business services, and healthcare services companies.
Comparing Short Term and Long Term Incentives
Most companies deploy a standard lump sum retention program without consideration for varying degrees of effectiveness. Doug Circle, CEO of Circle Vision, highlighted the importance of pre-planning the ownership change process and designing incentive plans that will continue to motivate key employees beyond the transition.
Before implementing any incentive structure, it is important to understand the range of incentives and the behaviors they are designed to drive.
Short Term Incentives
Short term incentives include base salary, commission, annual bonuses, and benefits, and are relatively easy to implement.
- Purpose: These incentives are designed to motivate year-to-year productivity.
- Benefits: Employers can tailor bonuses to meet the specific needs of the executive and align interests based on near-term targets.
- Limitations: Employees can learn to manipulate short term incentive systems to increase their bonuses, so it is important to align bonuses with profitability goals.
- Considerations: Base salary should be commensurate with the marketplace based on annual revenue, ownership structure, responsibilities, and industry. Beyond base salary, various forms of incentive bonuses come into play with mechanics based on individual, department, or company performance. It is also important to consider an executive’s control over revenue, gross margin, profit, and other financial measures when crafting bonus mechanics. For example, a plan tied to gross margin might be appropriate for a sales leader, whereas one based on operating profit might be more appropriate for a CFO.
Long Term Incentives
Long Term Incentives are commonly structured as equity, profit sharing, phantom stock, restricted stock, operating stock, or stock appreciation rights (SARs).
- Purpose: These incentives are often tied to a key milestone and are designed to align employee interests with the company’s interests.
- Benefits: The benefit of structuring long term incentives is the flexibility in customizing vesting schedules and linking them to key milestones.
- Limitations: The downside is that long term plans can be complex to structure and administer. It requires employees to understand their value creation and the impact of a liquidity event.
- Considerations: Phantom Stock or SARs are an increasingly popular choice for privately held or family-owned businesses as they encourage an ownership mentality without diluting equity. Shares cannot exchange hands and voting rights are not granted. These programs allow for flexible vesting schedules with annual payments or dividends. More commonly, payment is offered upon liquidation so early termination would forfeit an employee’s right to the plan.
Co-investing
Co-investing is another powerful tool that allows key employees to invest alongside ownership. As John Dahlgren, VP of Talent at SBJ Capital, explained: “Co-investing is generally a good strategy for ensuring alignment and retention. When someone invests their own dollars into their employer organization, they are more likely to have greater level of commitment and effort as they have skin in the game.” Darryl Brooker, CEO of Latitude Wines, acknowledged that co-investing creates an ownership mentality and acts as a retention mechanism.
However, he cautioned, “Co-investing needs to be very selective and only for the most senior employees, as compared to equity awards. Structuring co-investing requires quite a bit of work and in the worst form, it can confuse business goals as well as short-, medium-, and long-term decisions.” He added, “The upside is that it creates an ownership mentality, drives loyalty and acts as a retention tool. The downside is that when an employee has money tied up in the business, it can make separation more difficult. An additional downside is that it can negatively impact strategy when an employee takes their personal investment into account and prioritizes it before the needs of the business.”
Non-Monetary Incentives
Non-monetary incentives, such as mentorship, training programs, and career advancement opportunities, should not be overlooked as they are critical for mid-level engagement and retention. Dahlgren also highlighted a few career development opportunities presented by the transition to private equity backing: “When private equity invests in a founder-led business, a more robust governance structure is typically put in place. There will likely be formal board meetings which afford certain employees the opportunity to gain exposure to and sharpen their communication skills in a boardroom setting. Additionally, they may begin to work with, and be mentored by, experts who are brought in as outside board advisors.”
Tailoring Incentives to Different Levels and Individual Drivers
However, not all employees are motivated by the same factors. As Circle explained, “There are entrepreneurs, there are professional managers, and there are people who want to be employees. For those who want to be employees, stock ownership plans are less appealing because they tend to view it as risk, whereas entrepreneurs will be motivated by the upside potential.” Dahlgren added, “At the end of the day, incentives always need to be aligned with both the needs of the business and the motivations of the individual employees.”
- Senior Management: Greater emphasis should be placed on structuring competitive long-term incentive plans that align key executives with the company’s success. Involving senior management in the transition planning process also helps to secure their buy-in and commitment.
- Middle Management: Assigning career development opportunities, such as system or process integration projects, is critical to maintaining the engagement of key leaders during the transition. Circle highlighted, “Middle management is often the bridge between senior leadership and the broader workforce. These employees are crucial for maintaining communication and morale during the transition.”
- General Workforce: Employee Stock Ownership Programs (ESOPs), enhanced benefits packages, and employee recognition programs can create a sense of shared success and reinforce the company’s commitment to its employees, if the value of these programs is communicated effectively.
Circle explained that he has typically identified 2-3 key people who are critical to the success of the sale transaction and has provided them with equity ownership. He added, “The key people should be paid at least 115% of market rate for their services as they are difficult to replace.” He has opted for simplified and frequent cash bonuses for second and third tier employees who are critical to operations, as they understood the value of cash versus equity-based compensation, which they viewed as risky.
It is essential to understand individual motivating drivers and tailor incentives accordingly. Some employees value stability more than entrepreneurial upside. In this instance, incentives that provide a sense of security, such as competitive base salaries and clear career paths, are more appealing. As Dahlgren noted, “Salaries need to meet the immediate financial needs of individuals, while equity appeals to those who are more motivated by wealth creation opportunities and want to be in a role where they can directly affect that outcome.”
Aligning individual drivers with the strategic goals of a business is as important as an effective implementation plan.
How to Implement Incentives and Measure Success
Incentives are only effective if the structure is clearly communicated and if the hurdles that impact the pay-out are deemed to be realistic and achievable. “Everything starts with communication and making sure that you set clear expectations, provide timely updates, and always follow-through,” said Dahlgren. Employees need to understand how the new ownership will bring growth opportunities that the previous owner could not. This understanding builds trust and helps employees see the potential benefits of staying with the company.
Brooker shared, “Effective trust-building involves frequent, transparent communication about the reasons for the transaction, the plans for the future, and involving employees in these plans. The best examples I have seen are when key staff are defined pre-transaction, retention bonuses are put in place and all employees (new and old) are part of the planning process in terms of strategy and change. However, it is crucial to manage cultural integration and consider letting go of employees who do not align with the new vision, as keeping them could hinder progress and disrupt the positive work environment.”
Clear criteria for these bonuses are also essential, as ambiguity can lead to dissatisfaction. Dahlgren emphasized, “If poorly structured, bonuses have the potential do more harm than good, particularly if people believe that they earned an amount greater than what they actually receive.” Bonuses should be tied to clearly outlined performance goals that are realistically attainable. Dahlgren warned, “If these targets are not attainable, bonuses can quickly turn from an incentive to a disincentive, leaving employees feeling frustrated or defeated.”
Circle emphasized the importance of pay out cadence. He believes that structuring incentives with condensed payment schedules is more effective at maintaining engagement over time. Circle noted, “We’ve had the best results paying bonuses out quarterly instead of annually during an ownership transition.” This approach keeps employees motivated by making the next bonus feel within reach, while also building trust in the new ownership.
Don’t wait for long term retention plans to near their horizon before setting new performance targets and incentives. As Dahlgren emphasized, “You always have to be considering what the next long-term incentive is. I’ve observed individuals staying just long enough to receive their retention bonuses, which ultimately becomes their finish line rather than a milestone in the race. Employees may not stick around beyond that point if they don’t have line-of-sight to the next milestone.” Structuring rolling incentive cliffs is critical to maintaining long term commitment. If you have the luxury of pre-planning a transition, Circle recommended ‘seasoning’ the incentive plan for at least 2 years before the ownership change to ensure it is effective.
Brooker highlighted the importance of implementing incentives that are appropriate for the lifecycle of the business. Brooker noted that for family-owned businesses preparing for sale, retention bonuses for mid-level staff and a percentage of sale value for senior management are common. In contrast, private equity roll-ups, which require rapid growth and integration, benefit from a combination of retention bonuses and integration bonuses tied to specific milestones. He commented, “It is the most challenging to set up meaningful incentive plans for M&A transactions as there is typically friction between the expectation for fast growth but also to integrate the businesses and find synergies between accounting, production, sales teams, etc. I have found this is best built through a combination of retention bonuses and integration bonuses once key employees have hit predetermined milestones.”
The success of the incentive programs should be continuously evaluated. This includes assessing their effectiveness post-transition and being prepared to adjust based on new milestones and the motivational drivers for key employees.
Summary
Retaining key talent is critical to ensuring continuity and long-term success during ownership transitions. Insights from industry leaders such as Darryl Brooker of Latitude Wines, Doug Circle of Circle Vision, and John Dahlgren of SBJ Capital emphasize the need for tailored incentive plans that align employee interests with company goals.
Incentive plans should be customized to suit different levels within the business with consideration for how they drive behaviors. Short-term incentives like bonuses are effective for immediate results, while long-term incentives, including profit-sharing and stock options, align with the company’s future. Non-monetary incentives, such as career development opportunities, should not be overlooked as they can enhance retention by providing a sense of growth and stability.
The success of these incentive programs relies on clear communication and realistic, attainable goals that are within the employee’s scope of control. Regular evaluations and adjustments are essential to ensure that the incentives remain effective throughout the transition and beyond.
Most of the food and beverage businesses that engage 3P Partners are preparing for their next phase of growth. Partnering with a recruitment firm that can articulate the value of tailored incentive plans ensures the engagement of key leaders during an ownership change.
Doug Circle | Circle Vision
Doug Circle has built a strong reputation in the agricultural and commercial real estate sector. Doug is a graduate of California Agricultural Leadership Program Class of XXV. From 1978 to 2005, he successfully acquired and integrated 20 companies, culminating in the formation of Sunrise Growers, Inc. The company emerged as the largest processor of frozen strawberries in the United States. In 2003, Doug made the strategic decision to sell Sunrise Growers, Inc. to private equity investors.
Doug established Circle Vision in 2003, as a privately owned commercial and agricultural real estate investment company.
Darryl Brooker | Latitude Wines (LWX)
Darryl is the Chief Executive Officer of LWX. LWX sources, imports and distributes private label alcoholic beverages, primarily wine and spirits, to large national and regional chain retailers in the United States.
Darryl Brooker initially began his career in the global wine industry as a winemaker at Mountadam Vineyards in the Barossa Valley, Australia. Wine industry roles followed in New Zealand, working for Villa Maria Estates in Marlborough and Hawkes Bay before relocating to Canada in 2003.
After holding progressive production, operations and management roles, Darryl most recently held the role of President for the Mark Anthony Group, overseeing the farming, production, operations, sales, and finance for a group of six wineries in the Okanagan Valley, British Columbia. Over his 25-year career in the wine industry, Darryl has built global relationships and has sourced bulk and bottled wine from all the major global regions.
Darryl holds a Bachelor of Applied Science – Wine Science degree from Charles Sturt University in Australia and he also has a Graduate Diploma in Wine Business from Adelaide University. More recently, Darryl completed the Wine Executive Program at the University of California, Davis.
John Dahlgren | SBJ Capital
John Dahlgren joined SBJ in 2022 as Vice President of Talent, bringing over 13 years of experience in executive recruitment, human capital planning and private equity. John collaborates with SBJ’s investment teams, partner company executives and executive recruiters to develop and execute customized recruiting plans for strategic hires. Prior to joining SBJ, John served as EVP of Talent at Tide Rock Holdings (“Tide Rock”), an investment firm focused on lower middle-market buyouts of founder-led businesses. John managed the talent function across a portfolio of 11 companies in services, healthcare and manufacturing. He also cultivated a bench of industry advisors to support commercial due diligence and the sourcing of potential investment opportunities.
Prior to joining Tide Rock, John was a Principal with Bespoke Partners, a retained executive search firm dedicated to partnering with leading private equity firms to recruit talent at every stage of the investment lifecycle, from growth equity to buyout. Before Bespoke Partners, John was the Director of Private Equity Executive Search at Manta Resources.
John graduated with a BA from Ball State University, double majoring in Entrepreneurship and Human Resources Management. When John isn’t identifying the next strategic hire, he keeps active with outdoor activities such as hiking, kayaking and skiing. John lives in Southern California but will never trade his Midwest roots and remains an avid Indianapolis Colts fan. Go Blue!