For any chief executive officer who has decided to put his or her business on the block, a crucial issue is how to retain key managers before and after the sale. If the most valued employees decide to leave once it becomes clear that a sale is imminent, a CEO has two concerns. In the short term, the value of the company may decrease; in the long term, the exodus of top managers may cripple the ability of the new owners to run the business.

One strategy CEOs should consider is management contracts and/or a bonus system. Contracts generally cover one to three years' time and usually include provisions for full salary plus insurance and a pension. Discretionary bonuses can be structured in a variety of ways. For example, a key manager may receive 50% of a cash bonus when the sale is closed, and the remainder 12 and 24 months later. If the company buyer subsequently replaces the manager, the buyer would still pay the amount covered by the earlier agreement, but would not be obliged to pay salary.

When Albert Kurtzon sold Alkco Manufacturing Co., his $12-million Franklin Park, Ill., leghting fixtures company, the vice-presidents in charge of sales, operations, and manufacturing each received a bonus of one year's salary in addition to a one-year employment contract with full benefits. "These people were essential to the long-term success of the company," Kurtzon says. "Without them, it would have been a very different business."

Buyers bristled when they found out about Alkco's agreements, in part because the contracts and bonuses added $400,000 to the selling price. "As an acquirer, I saw it as one more hurdle, a pair of handcuffs," says Joe Incrocci, senior vice-president of Jac. Jacobsen Industries U.S.A., a Greenwich, Conn., subsidiary of a Norwegian company. Yet after meeting with the management and assessing the company's growth prospects, he agreed to buy Alkco. "We considered the agreements a part of the purchase price," Incrocci says, "but they left a bad taste in our mouths."

One way to defuse problems is to include key management in the negotiations. "Open communication in a sale can go further than monetary rewards to assure that key people remain with the company," notes Orville Mertz, a Milwaukee business broker. Adds Gary Roelke, a senior vice-president in the Teaneck, N.J., office of Geneva Business Services Inc., "In the end, it may be more important for the buyer to establish incentives for managers. That goes a long way in forging an important alliance."