4 Reasons for private companies to consider employee ownership as a part of their succession planning

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by Employee Share Ownership on March 21, 2012

1.Succession planning
When it is time for an owner to sell all or part of a business, either because of retirement or simply wanting to start a new venture, there are several choices for a company to consider in its succession planning. These include family succession, a trade sale, liquidation of assets, listing on the stock exchange, selling to management or selling to the employees (which will include management as employees).

There may not be a willing family member to take on the business. A trade sale can be time consuming and costly and will open the business up to intense scrutiny. Selling to a third party may result in the facility being closed. Even if the business is kept open, key staff may be replaced when ownership is transferred. This may be contrary to the fundamental philosophy of the owner.

The last option – selling to the staff – is not one which most owners think about, but it can be an efficient route for business transfer, for maximising the value of the business, for preserving goods and services within the locality and for safeguarding jobs.

Employee share ownership plans can facilitate ownership succession whilst ensuring business continuity and preserving business value and jobs.
The leveraged ESOP is an ideal tool for an employee buyout or buy-in. It is well suited to succession planning through providing retiring owners with a way of selling the business to their employees. This model uses financing from external sources, company loans (that are repaid over time) or employees own finances to fund a gradual or single buy out using a trust vehicle.

2. Attracting Employees

Often private companies or start up organizations do not have all of the benefits or the same level of cash remuneration as their larger counterparts. What they do have is greater flexibility, greater employee engagement, less hierarchy and more creative and innovative solutions.
Employees are attracted to the Company culture and are willing to take a lower salary if there is an equity plan or ESOP that has a large potential upside. There is greater risk but there is greater potential reward.
From the employers’ side this assists with cash flow but also attracts, motivates and retains key talent.

3. Retaining Key talent
There is a fundamental difference between being an owner of a business than an employee of a business and the potential financial gains from ESOPs tend to focus employees on the success of the business as well as acting a real deterrent to employee’s leaving the company. The ESOPs need to provide a sufficiently large part of the equity of the company or to have large potential pay outs to be attractive enough to retain talent.

4. Being market competitive
Most companies are competing with other organizations which will commonly offer ESOPs to key talent and staff. 90% of listed companies have some for employee ownership.

If you would like to know more about how to include Employee Ownership in your succession planning, please contact us for further information.

See also the following pages:

(i)         6 Key Decisions when Implementing a Share or Equity Plan in a Private Company
(ii)        5 Key Considerations For Small Business/Family Business Owners

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