From turning your dealership over to your son or daughter to selling it outright, it is in everyone’s best interests to ensure the business will continue to grow and prosper. Without retaining capable managers and other key employees, most dealerships don’t survive the departure of the owner. So, a critical part of any succession plan is a strategy for identifying and keeping key employees on board.

Key employees are not just those with the highest salaries or most elevated positions. They include experienced, dedicated people in operations, finance and all departments. Keeping key employees is a challenge. They will be concerned about the future of the business and for themselves under new, unproven leadership. They may be reluctant to work for a new boss, especially when the successor is the departing owner’s child or other family member.

It often takes incentives to retain key employees after the owner departs the business. There are no “one-size-fits-all” incentives. Financial incentives are typically best, but a combination of monetary and non-monetary incentives are often best at uniting the needs of the dealership with the desires of a key employee.

In our succession planning work with dealers, we consider seven components in customizing a retention strategy:

1. Identify key employees and their goals. Key employees are those who are critical to the continued success of the dealership, in any department, at any level. These are people with valuable experience that the dealership doesn’t want to lose.
2. Communicate with employees to lessen fears and concerns. Employees are unsettled by change and concerned about losing the rapport with leadership they have built over the years. We suggest open communication before and during the transition about changes as they occur.
3. Point out the positives of continuing to work for the dealership. Explain the value of working with the new leadership and that their jobs are secure. Present a long-term view of the business and the decisions that are being made to ensure it.
4. Give key employees responsibility for the dealership’s ongoing success. Involving key employees in strategy sessions and planning gives them a sense they are helping create the future and they will be more excited about staying to realize their vision.
5. Reward them through incentives. There are many options when it comes to incentives, but the best is to incentivize with money. Ensuring key employees are paid at or above industry standards for their positions is one key to retaining workers. One of the biggest mistakes dealerships make is increasing an employee’s responsibility without adjusting compensation. Beyond base pay, you can offer bonuses for meeting short-term performance goals, deferred compensation for longer-term objectives, stock and phantom stock ownership, and retirement savings programs. Non-monetary incentives include benefits like time off, flextime, educational opportunities and other work-life balance programs. Our firm, HBK CPAs & Consultants, developed the Dealership Funding Formula (DFF), which combines elements of open-book management with bonuses for employees when the dealership is achieving its goals. Under the DFF, profits are divided among funds to be put back into the business, distributed to the owners (since the owners are looking for a return on their investment) and, ultimately, shared by all of the employees.
6. Consider offering non-taxable fringe benefits. Medical reimbursement plans, group term life insurance and other fringe benefits can be provided tax-free to employees. You can target selected employees with “non-qualified” plans that are not subject to discrimination rules. (Email me at rcollins@hbkcpa.com for a list of these benefits that can be selective and do not increase an employee’s taxable income.)
7. Explore the use of employment contracts. Employment contracts are rare in dealerships, but occasionally can be useful in retaining key employees. You can use a contract to tie monetary or non-monetary benefits to helping the business achieve certain performance levels. For employees, contracts can increase job security and guarantee salary.

Often, the use of an employment contract actually increases the value of the business since the new owner has some guarantee that the key employee will continue with the dealership after the closing of the transaction. Contracts should contain details on compensation and the terms of any bonuses or other incentives, including severance pay. You can include a non-compete clause, non-disclosure or trade secrets clause, anti-moonlighting clause, and dispute resolution language.

One drawback to a contract is that an attorney must draw it up, which can be costly. It can also lead to unintended consequences, like a lawsuit when an employee decides the contract has been violated.

There are many different approaches to keeping employees under new leadership and keeping them enthusiastic and committed to the growth and prosperity of the business. It is important to think through the options and determine the best approaches for your dealership in advance of your departure — and retaining key employees an essential part of your succession planning process.

Learn more in Succession Planning Step-by-Step, parts 1 and 2.