The Man Who Already Owned It

The owner and I met 3 times before I understood the company, and the understanding did not come from him. It came from watching who the phones interrupted. Over 2 long meetings in the owner's office, his phone never rang once. Down the hall, the general manager's line went constantly, customers, vendors, the bank, the shop floor, a machine down, a truck late. The owner narrated the company's history. The GM was running its present. 

The arrangement was almost a decade old and completely stable. The owner had drifted out of daily operations 9 years earlier, first to half days, then to seasons. He fished. He was, by his own cheerful account, excellent at it. The GM hired, fired, quoted, priced, collected, and grew the business through 2 downturns. Revenue had roughly doubled on his watch. His compensation over those 9 years was a salary, a modest bonus in the good years, and a turkey at Christmas. 

Both men knew exactly what this was. Neither had ever said it out loud, and the silence held right up until the owner decided to sell. 

The Collision Built Into the Cap Table 

Here is the collision, and once you see it you will see it in half the companies in the lower middle market. The value a buyer pays for is, in large part, the GM. The durability of earnings, the customer relationships, the fact that the place runs without the owner. Every dollar of that value flows at close to the man who holds the stock, and the man who built the recent half of it holds none. 

The GM does the math the moment he learns a sale is coming, and he does it fast, because it is not hard math. The owner leaves with generational money. The GM gets a new boss and, if the buyer is careless, a worse deal than the one he has, since at least the old owner left him alone. Somewhere between LOI and close, the GM realizes he holds enormous leverage at the exact moment his loyalty is being repriced to zero, and every buyer's diligence list has a line item that depends entirely on him staying. 

In this deal, the owner's instinct was to handle it the way he had handled 9 years of turkeys. He figured a modest stay bonus, announced late, would cover it. The man was a Scrooge about it, in the most literal sense, generous in his own mind and 2 decimal places short in everyone else's. I have thought a lot about why owners who are otherwise decent get this so wrong, and I believe the answer is simple. Admitting what the GM deserved at exit would mean admitting what he had been worth all along, and 9 years of salary reviews had been built on not admitting it. 

What a Management Incentive Plan Actually Does 

The clean fix has a boring name, the management incentive plan, and the mechanics matter less than most people fear. A MIP carves a pool of equity value, typically 10% to 15% in deals this size, for the leaders who will drive the next owner's returns, and the GM usually holds about half of it. It typically vests over time and against performance, pays out at the next sale alongside everyone else, and costs the GM nothing to receive. Structured as options or profits interests, it takes value the future creates and points a slice of it at the people creating it. 

Put numbers on it, because the numbers are what convert skeptics. Take a company that sells for $10M today and, through the GM's work over a 5-year hold, sells again for $18M. A 12% MIP pool on that second sale is worth about $2.2M, and the GM's half of it is roughly $1.1M. Against that, the owner's alternative of a $100K stay bonus reads like what it is. And the cost lands almost entirely on future value the GM himself creates, which is why a well-built MIP is the cheapest expensive-looking thing in a deal. 

What a MIP actually does is quieter than the mechanics. It converts the GM from the deal's biggest risk into its biggest advocate, in about one conversation. It answers the question every key employee silently asks during a sale, what happens to me, with a number and a document instead of a reassurance. And it lets the buyer underwrite continuity as a contract rather than a hope. The vesting protects everyone at once, since a GM who leaves in year one forfeits the unvested pool, which means the plan pays only in the world where everybody got what they underwrote. 

In the deal I am describing, the MIP conversation happened, though later and more awkwardly than it should have, and the structure ultimately came from my side of the table rather than the seller's. I would rather it come from the seller. An owner who walks in having already set aside recognition for his GM presents a stronger company and, in my experience, gets paid better for it, because the buyer's single largest post-close risk has been retired before the first management meeting. 

For 9 years the owner had captured every dollar the GM created. The sale was the moment that arrangement finally presented its bill. 

Paul W. Swaney III

The Owner Who Reads This 

If you own a company that runs without you, some version of this story is already unfolding in your building, and the generous reading of your GM's silence is loyalty. The accurate reading is that he is waiting to see what you do. 

You do not need to hand out stock tomorrow, and depending on your plans, actual equity may never be the right tool. A phantom equity plan or a transaction bonus agreement, drafted this year rather than during a sale process, accomplishes most of the same work. What matters is sequencing. Recognition designed calmly, years out, reads as leadership and costs you a sliver of a bigger number. Recognition extracted under deadline, with a buyer in the data room and the GM's resume suddenly current, reads as ransom and costs more in every currency involved. 

The bill for those 9 years exists either way. The only question an owner controls is whether he writes it himself or has it presented to him. 

Why I Fund It Myself 

As an independent sponsor, I need the GM more than an institutional buyer does. A fund can parachute an operating partner into a stumble. My model is built on backing the operator who already runs the place, which means his conviction is the returns model. So I put the MIP in my structures from the first conversation, funded out of my own economics, and I show the GM his document before close, not after. 

The man who already owned it in every way but one deserves to own it in that way too. Deals go better when the paper finally agrees with the truth. 

I am the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.