If you’re nervous about losing your better-than-average-billers, you have good reason. Our statistics over the past 20 years show that 78% of all consultants who left their employers and remained in the recruiting field, started their own businesses. You may have even been one of them.Keeping your doors open is much harder when they’re revolving. The underlying problem is that better-billers have exactly the attributes that make them want to leave: Self-esteem, persistence and creativity. Couple this with motivation, experience and money (in that order), and they’re gone. The good ones are all entrepreneurs at heart.The usual list of perks (perquisites) includes insurance and retirement plans, profit-sharing and deferred compensation plans, club memberships, financial and legal counseling, vacations, interest-free loans, expense reimbursement and a company car.Unfortunately, in a small business, everybody must pull their own weight, so the recruiters are actually receiving nothing above their earnings. Since you can’t make one dollar do the work of two, perks become an optical illusion done with mirrors and lights. The only possible advantage to employees is the tax savings, but this is mul?tiplied geometrically when they own their own business.Simply stated, the perks don’t work. Neither does intimidation over the long pull.Oh yes. There’s always paying employees under the table in cash. Or paying wages to some destitute person in the consultant’s family to avoid taxable income. Or the IRS’s favorite, trying to treat the “consultant” or “account executive” as an independent contractor. Most people who do these soon learn that the common interest with the employee in reducing payroll taxes does not extend to a common interest in tax evasion. You are liable for every dime, and every dollar of penalty. Personally.There’s only one way to assure continuing loyalty (and much higher billings): Transferring a piece of the business to your key employees.We have always advocated incorporating. For transferring ownership, it is essential. Then you need a document called a buy-sell agreement. In his book Milking Your Business for All It’s Worth, John Gargan observes:
There are very few lawyers who know how to draft a proper buy-sell agreement. In 23 years of looking [at these], I have seen only two that made me say, “Now there’s a real craftsman. There’s someone who really knows how to write a proper document!” Unfortunately, most lawyers patch together a bunch of “boilerplate.”
This is your business we’re talking about. Make sure any buy-sell agreement that transfers, at least contains provisions for:
Article Continues Below
Guide: Practical Tips for Remote Hiring
- Purchasing the stock upon resignation, disability, retirement or death.
- Valuing the stock.
- Insurance for purchasing the stock.
- Restricting transfer of the stock unless pursuant to the agreement.
- Disposing of the stock in the event of a common disaster.
- Arbitrating disputes without the expense and delay of litigation.
- Restricting unfair competition and use of trade secrets by the employees.
The two causes of most stock transfers are disability and death. Statistically, one out of ev?ery three owners will suffer a long-term disability or die before the age of 65. This means insur?ance is necessary for a major buy-out by an employee. A competent insurance agent should be contacted. Ask for the figures on an entity purchase plan. This is a buy-sell agreement between the corporation and each shareholder. The corporation is the owner and beneficiary of a policy on the life of each of the shareholders. The amount of the policy is updated periodically, so it equals the value of the shares each holds. Upon the death of any owner, the corporation purchases the shares from his or her estate. Then they are retired as “treasury stock.”As you can see, this leaves the remaining owner(s) with proportionately larger pieces of the whole enchilada. If you want your beneficiaries to continue the business with the surviving owners, just don’t insure your life in this way, and provide for it in the agreement.When policies are issued to the shareholders instead of the corporation, the device is called a cross-purchase plan. The tax consequences should govern which plan to use. This is where a competent accountant can help.Valuation, price and terms all need to be negotiated, both for the initial transfer and any “phase-in” of stock. Many tie them to production, often including a schedule of “cash-in” goals. If the recruiter meets or exceeds the goal, the additional shares are issued. A portion of the commission (sometimes including a contribution by the corporation) is retained in the draw account as the fund for the purchase.This avoids the possible argument by third parties that the transfer was without consideration. You can raise the commission, adjust the draw or otherwise play with the numbers to minimize the impact on the recruiter.How much ownership should you transfer? Anything up to 49% is fine. That way, you’ll always have the power to make the bottom-line decisions. You can elect a majority of directors, and thereby control board decisions, including who are appointed as officers to operate the business.Regardless of how you structure the ownership of shares, it’s certain the board won’t want to declare dividends. This is because they are taxed twice (once when they are issued, and again when they are received). You’d be better off just giving a bonus to the key employees. At least that way the corporation can deduct it.If you have over 25 employees (yes, temps qualify), and a payroll of at least $500,000 per year, check out a formal employee stock ownership plan (ESOP). Many financial advisors specialize in establishing and administering them.Instead of funding a profit sharing (or pension) plan with money, you use the shares of stock. Then, instead of reducing the cash flow, you actually increase it! The money that would have been spent on the profit sharing plan is still available, and the corporation gets the full tax deduction. If you now hold stock, you can have the corporation pay you the full market value, or you can transfer money already in the profit-sharing plan to the ESOP, so it can acquire more shares.It is also possible for the ESOP to borrow money from a bank, and pay back the loan with the annual contribution from the corporation. Most banks will lend up to 75% of the value of the stock. Similar vehicles exist using life insurance.Ultimately, the transfer of ownership is the only way to retain and automatically motivate the better-billers. The mirrors eventually break and the lights eventually burn out. Anything less than a piece of the action is against the law… the law of human nature.