The ‘Compensation Equation’ Makes Acquisitions Work

The most successful and valuable M&A deals are those that prioritize a collaborative partnership focused on value benefits. The value of these deals goes beyond books of clients and revenue streams. They enhance and elevate growth potential by pairing firms for: operational efficiencies, geographical presence, household demographics, technology, and, talent and capacity.

Talent acquisition is critical for these transactions. It prompts questions like: how is compensation defined for retained talent and owners post-closing? And, is any current equity (held by acquired team members) reflected in converted shares or upfront/contingent cash payments?

The Compensation Structure

A complete compensation structure is a combination of salary, bonuses, and equity—or profit share—as a reward for business impact and ownership investment.

In the process of an acquisition, all three must be considered for each member of the transitioning team whether they’re owners or not. Key questions for solving this equation, include:

• What will the individual’s role look like post-closing?
• What will their expected impact on the new firm entail?
• How will key, non-owner talent retention be incentivized and rewarded?
• How will existing agreements be adapted and honored within the new arrangement?

The Compensation Equation

For transitioning owners, there are extra layers of complexity. The first is equity rollover. As with the team, each owner’s “compensation equation” will be considered individually and account for their existing equity share, post-transition role, and projected exit timeline.

The transaction value realized by each owner will depend on how upfront and contingency payments are balanced with the equity they are gaining in the partner firm. Younger transitioning owners may weigh this on the side of equity, recognizing the growth potential for the firm over many years. Owners with a shorter exit timeline, on the other hand, may choose to collect a higher percentage of upfront value over equity.

Owners face a significant transition when they join a new partner firm. Their role and responsibilities are often changed. They will likely go from a role that requires them to wear many hats—meet with clients, manage the team, implement operational systems, and more—to a role that focuses on just one of these responsibilities.

Whether by intention or necessity, this transition can be challenging.

Compensation and Deal Terms

Final business value in M&A is found in the deal terms, and the compensation equation is essential to that conversation. For acquisition partnerships that involve firms joining forces to grow, the compensation negotiation comes in two parts: how value is realized through retained equity and the post-closing compensation for the role of every transitioning team member and owner.

Though these negotiating points are separate on paper, they do impact each other when balancing ownership compensation details. Fluctuations in an owner’s role and salary are often balanced by upfront or contingent cash and equity percentage. Deal terms and value realization can also be affected by the transitioning owners’ employment and exit timelines.

Compensation is a critical way to evaluate an acquisition partnership when talent is a priority. The alignment of compensation post-transaction, consideration of existing agreements and internal succession plans, and the growth priorities of the team are all important to whether a partnership is a good match.

Additionally, owners can use this transition process as an opportunity to recommend compensation adjustments for team members whose current pay does not align with their envisioned role within the partnership. Owners can ensure the benefits of the partnership (for their team) by advocating for their value and setting a baseline for new compensation.

Compensation Essentials for Acquisition Strategy

As with many other aspects of strategic acquisition planning, preparing for the compensation equation is essential. Anticipating the personnel and ownership changes that come with an acquisition partnership allows for more confident negotiations and clearer deal terms.

Strategic acquisitions enjoy the most success when they are built around elevating the existing business: taking the time to identify where those improvements are most impactful and developing acquisition criteria that prioritize those areas. The acquisition of the right talent will often address multiple strategic priorities. Retaining that talent comes down to compensation.

Team retention and a smooth transition hinge on a solid compensation structure. It should include: existing systems for determining salary and bonus metrics; streamlined benefits onboarding; strong culture; and established equity pathway opportunities. A stable and successful compensation structure brings transparency, clarity, and incentive to talent acquisition.

These types of transactions—designed to build entities stronger than just the sum of parts—have the greatest potential for improved growth rates and value.

Guidance from the experienced enterprise and acquisition consultants at FP Transitions ensures that advisors are prepared to navigate the transaction, develop a valuable partnership, and nurture the powerful team that comes with it.

Solving the unique compensation equation of every acquisition and growth partnership is a necessity. The forethought and preparation of developing a supportive compensation structure will impact the partnership search and fit, deal terms and transaction value, talent retention, and the overall success of the acquisition.

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