How Business Owners Planning an Exit Can Use Stock Appreciation Rights (SARs) with Vesting to Incentivize Management and Drive Value

If you're a business owner thinking about selling your company in the next few years, one of the smartest moves you can make today is aligning your management team’s incentives with your ultimate goal: increasing enterprise value and ensuring a successful exit.

One powerful — yet often underutilized — tool to do just that is Stock Appreciation Rights (SARs) with a vesting schedule. SARs allow you to reward key executives for helping grow the business leading up to a sale, without giving up ownership or diluting your equity.

Let’s break down how this strategy works, and why it’s particularly effective when your business is on a path toward sale.

What Are Stock Appreciation Rights (SARs)?

Stock Appreciation Rights are a form of long-term incentive compensation. They allow management to participate in the upside of the business’s value growth, without owning actual equity. SARs pay out the increase in value of the business — usually in cash — based on a predetermined valuation benchmark (often the fair market value at the time of the grant).

For example, if you grant SARs today when the company is worth $10 million, and you sell in five years at $16 million, your leadership team could receive payouts based on that $6 million increase — a win-win scenario.

Why Vesting Is Key When Planning an Exit

Vesting schedules ensure that the SARs only become exercisable after a certain period or performance milestone. This is critical in an exit-planning context because it ties your management team’s financial reward directly to your timeline and success criteria.

Common vesting structures in this context include:

• Time-Based Vesting (e.g., 20% per year over 5 years): Keeps the team engaged through the pre-sale period.

• Performance-Based Vesting (e.g., hitting revenue, EBITDA, or value benchmarks): Ties payout to measurable value creation.

• Exit-Based Vesting (e.g., 100% vests upon sale of the business): Keeps everyone laser-focused on the end goal.

Why SARs Make Sense for Business Owners Looking to Sell

• Drive Value Creation: SARs give your key managers skin in the game — motivating them to improve margins, streamline operations, and grow the business valuation.

• Retain Your Leadership Team: Buyers often place a premium on a stable and experienced management team. A vesting SAR plan helps ensure they stick around through the sale process.

• Avoid Equity Dilution: Since SARs don’t involve actual equity transfers, you maintain full ownership and control right up to the transaction.

• Align Interests with Exit Objectives: Management gets rewarded only if the business value increases — precisely what buyers are looking for.

• Flexible Payout Structure: You can structure payouts to occur after the sale closes, using proceeds from the transaction — making this a cash-flow-friendly strategy.

Best Practices When Structuring SARs for Exit Planning

1. Get a Professional Valuation: You’ll need a baseline company valuation to determine the starting point for SAR appreciation. This also builds a strong foundation for a future buyer’s due diligence.

2. Clearly Define Vesting Triggers: If you want SARs to vest upon a sale, specify what qualifies as a triggering event and how payouts will be calculated.

3. Plan for Buyer Expectations: Many acquirers will appreciate that your team is incentivized to maximize value — just ensure your SAR agreements are clearly defined, transferable, and don’t create buyer liabilities.

4. Consider a Clawback or Rollover Option: Depending on the buyer’s structure, SARs can be converted to new incentives post-sale, keeping key talent in place under new ownership.

A Strategic Tool in a Thoughtful Exit Plan

As you build your exit strategy, remember: valuation multiples are not just driven by revenue and EBITDA — they’re also influenced by management depth, retention risk, and operational strength. SARs with vesting can be your secret weapon to maximize all three.

This approach creates a powerful alignment between your goals as the owner and the ambitions of your leadership team. Everyone rows in the same direction — toward a high-value exit.

Conclusion

If you're planning to sell your business in the next 3–5 years, don’t wait until the final stretch to start incentivizing your management team. A well-crafted SAR plan with a vesting schedule can help drive performance, lock in loyalty, and ultimately command a higher price at the closing table.

Your exit isn’t just about getting out — it’s about getting rewarded for everything you’ve built. SARs can help make sure you and your team both win.