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It can be quite common for key individuals to remain in place at a target company for a period of time following an acquisition, as their knowledge and experience can help to ensure a smooth handover and the business’ continued short-term success. Accordingly, in the context of a private equity case study, you might be asked how you could incentivise the founder of a business or senior members of its current management team to remain in place and perform effectively once the acquisition has completed.

Of course, if the management team have invested as part of the private equity firm's acquisition, they will have "skin in the game", which should motivate them. However, if they haven't, there are various mechanisms that you could suggest to help incentivise such individuals. A higher salary might incentivise them to remain in place, but is less likely to encourage them to work harder or more effectively, given that the salary won’t necessarily be tied to performance. Similarly, a one-off bonus might initially persuade them to remain at the company, but once they’ve received the bonus, they may simply leave. It might be more effective to offer incentives that are contingent on the individuals remaining at the company for a certain period of time and/or the individuals helping the company to hit certain targets (e.g. revenue or profitability targets). 

Such incentives could include, for example, shares, share options, and/or the promise of future bonuses, with such incentives being contingent on the individuals’ dedication to the business. 

Share options: share options are contractual rights to acquire shares in the future, usually in a quantity and at a price that has been agreed in advance. The receipt of share options is also typically subject to certain conditions being met, and these conditions tend to be set out in what are known as “vesting” provisions. Vesting refers to the process under which an individual (e.g. an employee or investor) becomes entitled to share options, usually over a set period of time (during which tranches of share options may be granted to the individual every, for example, 12 months). The receipt of share options may also/instead be tied to the individual or the company hitting certain performance-based milestones (e.g. the company hitting a certain revenue or profitability target). 

The final consideration for an acquisition could also be made partially contingent on the target’s performance post-acquisition, which is often achieved by including an “earn-out” provision in the Sale and Purchase Agreement. 

Earn-out: this is a pricing mechanism that can entitle a seller (e.g. the founder of a business) to further consideration following a sale, depending on the target’s future performance during what is termed the “earn-out” period. This can incentivise that seller to contribute towards the continued success of the business post-acquisition. Note that sellers are unlikely to accept earn-outs unless they can continue to exert some level of influence over the target’s performance during the earn-out period (e.g. by retaining a seat on the target’s board post-acquisition until the earn-out period ends).

Note however that where the seller is also the founder of the business, they may simply refuse to stay on, especially if they are looking for a clean break post-acquisition and want to receive all the money up front.

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