It’s difficult to lose any employee, especially one who has been instrumental to your success — and who knows proprietary management and financial information. Some dealerships have turned to non-compete agreements to protect their investment in these key employees.
Jack Maljaars of VineTech Equipment, Prosser Wash., has found a way that works better for them and for the employee. And, it avoids the legal hassle of trying to enforce a non-compete agreement. The dealership has been using a concept called key person insurance.
“We were looking for a way to retain valuable employees. Non-compete clauses are more short-term thinking and we wanted more of a long-term approach,” says Maljaars, who owns VineTech with his wife, Denise. The dealership carries Landini, McCormick, Rhino and other lines, including specialty equipment they manufacture.
Here’s how the concept works in general:
A company purchases a life insurance policy on its key employees, pays the premiums and is the beneficiary of the policy. In the event of death, the company receives the insurance payoff. These funds can be used for expenses until it can find a replacement person, pay off debts, etc.
In a tragic situation, key person insurance gives the company some options other than looking at filing immediate bankruptcy.
VineTech has adapted the approach by “overfunding” the policy, offering the long-term financial benefits to the employee, and the employee’s family is included as one of the beneficiaries. The dealership adds anywhere from $5,000-$10,000 per year that the employee has access to upon retirement, if they have been with the dealership for at least 10 years.
“We first offered this about 12 years ago, but we offered it to the employee too early. They didn’t see the value and they didn’t stay. The whole idea of the program is to keep those key employees.
We ‘benched’ the idea for at least 8 years and then pulled the program back out about 3 years ago when it was time to do something for some of our employees. You can structure the policy however you’d like, but we wanted to not make it too complex,” says Maljaars.
The policy is intended only for certain employees critical to the business. For other employees, the dealership offers an IRA program with company matching.
The dealership has not yet had much feedback from those who receive the benefits. Maljaars says it’s too early for that. “It doesn’t have a lot of momentum until you get down the road,” he says.
“We want to reward commitment...”
— Jack Maljaars of VineTech Equipment
Maljaars warns against using the benefit to keep employees who indicate they may be leaving the company. “You don’t want to use this as a tool if you think you are going to lose them. This is not a tool for that at all. This is an extra ‘thank you, but let’s make this a long-term deal’ approach. We want to reward that commitment and that’s what this policy is designed to do,” he says.
Joe Sprague, senior vice president for Nationwide Financial, says that VineTech’s use of key person insurance can be an effective tool to retain employees critical to a business and it’s a tool that is commonly used in succession planning.
“Are monies going to be available to pass the business on? That’s where key person insurance can benefit the company,” says Sprague.
He suggests these steps for dealers who are interested in pursuing the strategy:
- Identify those unique people in your dealership who are essential to its success. The business would suffer if these people were not in place.
- Go to a trusted advisor, such as your financial advisor, attorney or accountant, to learn more about the policy and how it can be customized. For instance, monies can be added to the policy for a retirement benefit for the owner or others.
- Talk with your advisor about your unique situation and your goals for succession.
- Periodically review the policy and make any updates based on changes at the dealership.
The company recently did a survey of small business owners and found that 2 out of 3 do not have a succession plan in place, with almost 40% of them indicating they do not think a plan is necessary.
Also, 42% of small business owners are not aware that succession laws vary by state, and that the state could determine the fate of their company’s future in the event of a crisis if a succession plan is not in place.
“Many owners are so busy working in their business that they don’t take time to work on their business and their own succession,” Sprague says.