Employee Share Ownership Plans as a Succession Strategy
The exit rate and preferred exit options are key issues to family businesses. The quickening approach of the baby boomers bubble and the fact that family owned businesses represent around 70% of the 2.1 million businesses in Australia correlates to a large number of business owners searching for an exit strategy to ensure the return on their equity in their business.
An Employee Share Ownership Plan (ESOP) provides an effective equity extraction strategy for the business owner in terms of:
- Funding an exit;
- Compliance and corporate governance issues;
- Delivering improvements in performance; and
- Achieving business continuity after the owners exit.
An ESOP provides a practical solution to an exit strategy fraught with incompatible timetables, lack of funding and inadequate structures. It is the structured approach for transferring ownership whilst facilitating the smooth exit of current owners. According to the 2018 Family Business Survey conducted by KPMG, 60% plan to pass on the leadership to another family member, while 34 percent intend to pass it on to a non-family member. There is thus a great need for the use of ESOPs as a vehicle for transferring ownership to facilitate smooth exit of current owners. This tool is very popular in the United States, with nearly half of all ESOPs there used by private firms to buy-out an owner. It also positions the business as a more competitive employer and attracts and retains key staff.
How does it work?
The decision to implement an ESOP is not for every business, however, if found to be suitable provides a viable exit strategy for the business owner and enables the business to continue operation. The plan provides a structure and mechanism for a profit share to be provided to staff solely for the purpose of purchasing equity in the business with those funds being reinvested into the equity of the business rather than taken at as cash payment.
An ESOP as a succession plan offers another dimension and long term outlook for key staff that often they never get. The result is truly a win-win outcome for exiting owners who want the best for the business and to achieve the best sale price for the asset, and for their employees – the people they need to make the results consistently improve. One of our clients, a multi-discipline professional services firm in Newcastle, introduced a Peak Performance Trust (an ESOP model developed by Succession Plus) in 2017, and has since then seen great improvement in engagement, performance and profit. The PPT has considerable success in attracting, retaining and motivating key staff within the business who now have a vested financial interest in maximising the value of the business for the owners and the staff.
The preference of implementing an employee share plan as opposed to other exit strategies (or in fact as stage one of an overall exit strategy) is gaining momentum in Australia and is equally gaining popularity amongst SMEs.