Overview
The most effective way to make key employees more bankable is by selling or providing them with bonus of common stock. If done far enough in advance the company’s earnings are used to pay off the stock purchase loan, making the employee debt-free by the time of the change of control. This ownership, combined with the shares they will purchase during the change of control, may generate enough cash flow to service the debt and meet bank covenants. Typically, the stock is sold with a buyback agreement that allows the shares to be returned to the company or the owner if the employee dies or becomes disabled.
Transcript
HI, this is Byron. I want to talk to you
today about common stock and exit
planning.
We find common stock that’s sold or
bonus to key employees is by far the
most effective way to help the key
employees become bankable. The reason it
works so well for them is that we’re
using the earnings from the company to
pay off the shares that are sold. And
then, by the time the change of control
occurs, the key employee has ownership
that is debt free. And then, when added to
the ownership that they would be
purchasing in the change of control,
perhaps there’s sufficient cash flow
coming off those two crunches of
ownership that it can service the debt
and meet the bank covenants. So, typically,
when we sell stock, we sell it with a buy
back agreement, which would be:
providing that if the key employees
should die, or become disabled to terminate,
the shares come back to either the
company or the owner who sold them to
them.
