Comp package for key-man operator on sub $1MM EBITDA acquisition

April 29, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

I'm currently evaluating the acquisition of a home services business. I need to hire an operating partner and am seeking advice on how to structure their compensation as I model and negotiate this deal.

Does anyone have any thoughts or advice after reading the below? I’m particularly interested in advice the compensation component.

Deal profile:

EBITDA >$1M
30+ year established home services business
Solid middle management layer to handle day-to-day
Current owner will entirely exit, not be around to help except minor consultation via phone calls

Operator profile & responsibilities (already have at 2 legit candidates, established relationship & high degree of trust):

Younger individual with relevant experience but not a lot of capital
Needs to be in the business day-to-day for###-###-#### months. Goals are the a) ensure successful transition, b) solidify & train a management layer, c) build processes and financial controls we can use to manage the business on an going basis
After that initial stint, I want that individual to be part of the ownership team, be ultimately responsible for successful operations, but not “in the business” day-to-day.
Capital contribution: I expect the operator will contribute either a very small investment ($10-20K) or nothing.

Compensation

Base salary - what’s a good benchmark? $125 - $150K seems to be what it takes to hire a serious GM in Virginia.
Equity - does anyone have good examples of how this has been done? Obvious market comp is a search fund model where they get approx. 8% at deal close, 8% vesting over 3-5 years, 8% based on performance goals. Since they aren’t closing the deal I’m thinking something like 15-25% equity, half based on vesting schedule & half based on performance

Reply by an intermediary
from The University of Chicago in United States

A few thoughts: - Base Salary: $125-150K seems reasonable for a General Manager role for the given industry/geography. I would benchmark against other residential services businesses (plumbing, electrical, HVAC, etc) of similar size in your target market. - Consider structuring the base with a 3-6 month ramp up period at a slightly lower amount (ex. $100K), increasing to full salary once transition is complete. Equity Compensation: For an operating partner not providing capital, 15-25% equity might be a little high; I would incorporate an opportunity to contribute long-term on a capital-in basis. I would structure 50% as time-based vesting over 4 years (12.5% upfront, 6.25% annual vesting). This encourages retention through the transition. - The remaining 50% can vest based on performance goals over 2-3 years - EBITDA targets, customer retention, cost reductions, etc. - Include acceleration provisions if the company is sold. - You may also want to negotiate some upside participation (bonus pool) tied to exit value. - Other Compensation: Minor reimbursements for travel, cell phone, etc related to work. Include eligibility for standard benefits (health insurance, 401k match if offered). Ensure appropriate D&O insurance is in place.

Reply by a searcher
from Northwestern University in Washington, DC, USA

Guessing Luke tagged me as I am an operating partner with a couple companies (and live in Northern VA as well). There are a lot of good thoughts already shared. To try to be additive, one thought is to clarify if you are looking to hire a General Manager or an operating partner. You can define it as you deem appropriate, but if you really think it is closer to 3 years as acting GM, then tailor accordingly. Operating Partner structure can vary and depends on the role definition. The other question is to think about the overall incentive compensation approach for the team you will create (e.g. phantom equity vs. profit sharing).

With PE investments, compensation often includes the opportunity to co-invest, profits interest and cash compensation as it can be a tax efficient approach for the operating partner, aligns incentives and is also lower cash cost to the company. For this situation, if you are raising equity then co-invest could be a mutually beneficial opportunity, but not a requirement. Also can see the argument to focus incentive compensation more on profit sharing in the near term for a GM (along with a market cash compensation). DM me if it would help you to talk through this live.

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