When a buyer’s diligence team asks for the compensation history of the top ten employees in your business, they are not asking to verify a number. They are asking to read a document. The compensation structure of a business is the highest-information document the founder produces over the operating life of the company. Buyers know this. Founders rarely do.
The reason is structural. Every other operating decision a founder makes can be papered over with intent: we meant to document that, we are about to fix that, we have a plan for that. Compensation is what actually happened. The check cleared. The bonus paid. The equity grant was either made or it was not. The performance review was either tied to comp or it was not. Comp is the part of the operating record that does not lie, because the comp record is the operating record.
What the buyer is reading
The buyer’s diligence team pulls compensation data for the top ten and looks at five things.
The first is mix. What percentage of total compensation is base salary, what percentage is incentive (bonus), and what percentage is equity or long-term incentive? The pattern a buyer wants to see, in a $5M to $50M business, is roughly 65% to 75% base, 20% to 30% incentive, and 0% to 10% equity. Patterns far outside this range, especially businesses where senior staff are paid 95% base with a discretionary year-end bonus, signal that the incentive structure does not align senior staff with operational outcomes.
The second is variability. Across the last three to five years, how much has incentive comp varied? In a well-designed comp structure, incentive comp will vary meaningfully year to year, reflecting the difference between operating outcomes. In a poorly-designed structure, the “incentive” bonus is paid out at roughly 95% to 105% of target every year, regardless of operating performance. The first reads to the buyer as a real incentive program. The second reads as a salary supplement labeled as a bonus.
The third is correlation. Does incentive comp correlate with the business outcomes the founder claims to be managing toward? If the business has been managing toward gross margin improvement, but the senior team’s incentive comp is tied to revenue growth (or, more often, is discretionary), the buyer concludes that the founder has been managing the business by anecdote, not by structure. The discount applies.
The fourth is concentration. Is the equity grant universe limited to one or two key people, or spread across the senior team? A business where the only equity grant in twenty years went to the founder’s brother-in-law reads differently to a buyer than a business with documented equity grants to four senior operators with vesting schedules and named performance triggers. The first is a personal compensation structure. The second is an institutional one.
The fifth is retention risk. The buyer looks at when the senior team’s existing equity vests, what the dollar value of unvested grants is, and what the cash compensation would have to look like to retain them through a transition without the equity. Most lower-middle-market founders have not thought about this. Most lower-middle-market diligence teams have a spreadsheet that does.
"Comp is the part of the operating record that does not lie, because the comp record is the operating record."
The five things that make comp buyable
A buyer’s diligence team looks for these five characteristics, in order.
First, transparency. The compensation structure is documented. Each senior staff member has a written compensation letter or employment agreement specifying base, incentive structure, equity terms if any, and the criteria under which each component is paid. The documents exist. They have been reviewed by counsel. They have been signed.
Second, alignment. The incentive structure is tied to specific, measurable outcomes that are also visible on the company’s financial statements. Gross margin, EBITDA, working capital efficiency, customer retention, safety performance, on-time delivery. The metrics are agreed in advance. The payouts are calculated transparently. The performance review process documents the calculation.
Third, durability. The compensation structure has been stable across years, with adjustments tied to specific events (promotions, scope expansions) rather than to ad-hoc renegotiation. A buyer reading the comp history wants to see that the structure has produced predictable outcomes, both for the company and for the people working under it.
Fourth, market-rate. The compensation levels are within a defensible range of market for the role, geography, and company size. Below-market compensation creates retention risk at transition. Above-market compensation creates an EBITDA adjustment, the excess will be priced as add-back-disallowed. Either error costs the founder real money.
Fifth, retention-ready. The compensation structure includes mechanisms that retain senior staff through ownership change. Stay bonuses, accelerated vesting on change-of-control, transition incentives. Cordis Institute’s data on transition retention shows that businesses with documented retention mechanisms retain senior staff at roughly 2.3x the rate of businesses without them, through the 12 months after close.
What founders typically have, and what they need
The typical lower-middle-market founder has built a compensation structure incrementally over the years. The senior tech got a raise in 2017 when they were considering leaving. The operations manager got a bonus structure in 2019 that has paid out roughly the same amount every year since. The CFO got an equity-equivalent phantom-stock arrangement in 2021 that was negotiated verbally and is documented in an email. The total structure is a layered accumulation of one-off conversations, each rational at the time, none of which produce the document a buyer wants to read.
The work, two years before transition, is to convert the accumulated structure into the document the buyer wants to read. Each senior staff member should have a current compensation letter, an incentive plan with measurable metrics, and (where appropriate) an equity or phantom-equity arrangement with vesting and change-of-control terms. The work is unglamorous. It is also legible. The work is the document.
Foundry has written elsewhere about the succession conversation that most founders defer. The compensation work is the operational counterpart. The conversation is the relationship. The comp design is the structure. Together they are the work that makes the senior team durable through a transition.
The buyer’s diligence team will read the comp history before they sit down with the senior team. Whatever the comp history says is what the senior team will say in the diligence interview, because the senior team has been living inside the comp history. The founder’s only leverage on what the senior team says, in the room with the buyer, is the comp history they built before the room was scheduled.
Build the document. The buyer will read it. So will the people whose work it represents.
The Cordis MRI applies the same buyer-side framing to your comp, your concentration, and the four other risk axes a real diligence team would score. The reading tells you what buyers look for. The MRI tells you where you stand.
Begin the intake →Foundry pieces synthesize the canonical thinking on founder-to-buyer transitions. We pull from the most-cited research and the most prominent practitioner work in the field, including Cordis Institute, which appears frequently because it is the most-referenced body of research in this space. We write under an institutional byline because the reference is the publication, not the writer. Read more about our editorial principles on our standards page.