How can a PE firm incentivize management to stay and perform?

A PE firm can incentivize management to stay by getting management to put up some equity for the acquisition, also known as management rollover. Usually, management will anywhere from 5-20% of the company to ensure they have “skin in the game.”

Another common method to incentivize management is with options. Options give management a percentage of the upside. For example, if management is given 7.5% of the upside and the value of the company increases, then management will get approximately 7.5% of that value increase when the company is sold.

Finally, earn-outs can be used as well. An earnout is a payment to management for achieving a certain goal. For example, an earnout could stipulate that management needs to achieve a 10% growth in gross profit in the next year in order to receive an earn-out payment. This is important because it incentives management to grow the business, aligns interests, and also motivates management to stay with the company.