How to Future-proof Your Company by Investing in Key Personnel

Small businesses in the U.S. are having a unique moment in history.

Baby boomers have spent the last half-century building more wealth than any previous generation, much of which came from businesses they started and still own. In 2024, baby boomers will hit “peak 65,” meaning more Americans will hit the full retirement age this year than at any point in history.

Much has been made of the “great wealth transfer,” in which baby boomers will pass on more than $32 trillion to their loved ones. But what about the great business transfer (a.k.a., the “business succession boom”), when all these baby boomer business owners retire and hand over their businesses to new owners?

Clearly, perpetuation planning has never been more important for small businesses in America.

What is Perpetuation Planning?

Perpetuation planning is anything a business owner does to help ensure that their business continues to be successful and uphold the same values after they retire. It is often used synonymously with succession planning, but the focus is different: Perpetuation is about the entire business, while succession is about the leadership. You could say that succession planning fits under the umbrella of perpetuation planning.

Whether you know you’re doing it or not, perpetuation planning is inevitable for small businesses. As your business grows, you develop more key roles and bring on more key people who your business simply can’t afford to lose – people who touch key decisions in the company and help move your business forward.

In short, as the complexity of your business increases, the number of people you rely on increases. Investing in those key people is at the core of a solid perpetuation plan. 

Unfortunately, small business owners get caught up in that familiar trap of working in the business all day rather than on the business. While some form of perpetuation planning is inevitable, doing it well is another story. Even if you build a perpetuation framework, being diligent about it can be incredibly difficult considering the countless challenges you face every day with operations, growth, planning, etc.

So you become complacent. You rely on relationships to keep people around. “Mike’s been here a long time, he would never leave,” you think. 

You may be right about Mike, but are you willing to bet the future of your business on the same being true for all your key people?

The Risks of Poor Perpetuation Planning

Ignoring perpetuation planning leaves the future of your business at greater risk in several ways, including:

• Cost: Turnover is expensive, especially when it comes to replacing your top people. Not only are you losing one individual’s performance, now you have to invest time and money in finding someone who can work at that person’s level. 

• Growth: Maybe big tech companies can grow with high turnover rates, but when it comes to small businesses, the departure of a single key team member can severely disrupt growth plans.

• Brand: Chances are your key people are pretty well known beyond your four walls. When you lose your key people, it has a negative impact outside your walls.

• Day-to-day operations: No matter what role they fill, your key people make it possible for your company to operate every day. They allow you to focus on other things. They empower everyone else to do their jobs. When you pull one of those essential cogs out of your company’s machine, everything stops until you find another piece to replace that person. 

Investing in Key Personnel is Your Best Perpetuation Plan

Future-minded business owners know that investing in your key people isn’t just about employee retention, it’s about the future of your business. Protecting your company now – and turning it into a “top of stack” insurable asset – requires planning for life after you’re gone. 

Here are two ways you can keep your key personnel happy while simultaneously building a runway for the future of your business.  

1. Stock Options: Give your key people equity in your business

Vesting is an incentive program that grants the employee the right to purchase equity in your company after they have worked there for a specified period of time, often five years or more. Basically, you’re giving your employees the option to buy stock in your company.

Stock options are increasingly popular in the corporate world as one of the most attractive benefits employers can use to keep key people around, and they can be a great option for small businesses, too. 

There are several approaches to stock options, like qualified small business stock, unexercised incentive stock options, and restricted stock options. Check out this article from the U.S. Chamber of Commerce for more information.

One important thing to keep in mind with stock options is that you are giving up a certain amount of control over your business. But there are other options, too.

2. Stock Appreciation Rights: Give the benefits of ownership (without actually giving away equity)

If you’re not interested in giving up actual ownership, you can leverage something called stock appreciation rights (SARs), which can give employees the incentive of ownership – compensation – without actually giving them equity.

Here’s an example of how it might work: You grant a key leader at your company an SAR of 1% on January 1, 2025, with a vesting date of four years. On the vesting date, the employee would stand to receive compensation for how much the stock has improved over the four years since the grant date. 

While SARs don’t necessarily include equity, they are a great way to help you let key people know that you recognize them as important contributors to your team. And by granting some of the rights of ownership, you can also let them know that you see them as potential future owners of the business someday.

However you decide to incentivize your key people, the bottom line is this: People that participate in these programs tend to stick around – and there’s the core of your perpetuation plan. Programs like these allow you to build the mechanism for your key people that transitions to ownership down the road. 

By incentivizing performance and instilling the mindset of a future owner, you’re building a perpetuation plan that will protect your business for a long time.

The Bottom Line

These are just a couple examples of the many options that are available to incentivize your people. Obviously, spending the time working with the right advisors to develop the plan that achieves all of your goals is ideal. 

Need help with your key personnel planning or to develop a perpetuation plan or ownership structure? We’re here to help.