Engaging employees as part of your exit strategy

You might not have considered including key employees in your succession plan but be aware they could be thinking about their role in the business when you exit. And highly motivated employees might be prepared to leave if they aren’t considered – potentially leaving you in a tight spot.

Recently, MNP met with a prospective partner for an engineering company, who we will call Dan. Dan is a 30-something engineer and recent addition to the company, which is considering him for ownership.

When asked why he left his previous employer, Dan explained he had observed the partners in his previous firm were at a stage where they were spending less time in the business, and asking more of their employees - but seemingly drawing more cash out of the business (new vehicles, vacation plans, etc.) Dan was bold enough one day, to ask, “What’s the plan for the business, and for me?” The partners confirmed to Dan they were slowing down and planning to spend more time doing other things.

They advised further that when they decided to retire, they would be looking for a buyer for the firm but were quite sure Dan’s job would be safe. Dan asked whether he might be eligible to acquire equity in the firm. The response was a hard “no,” as this was not the “direction the founding partners wanted to take.”

The next morning, Dan began looking for another job.

Your successors want a clear path

Let’s be real – the best and brightest employees have choices and plans. Like Dan, they have alternatives, and often families, and mortgages. If their current employers aren’t showing them a path to progression, that aligns with the plans for the future of the company (with skill, experience and often, age on their side), they can find an employer and company that can. 

With succession planning on the agenda for nearly 72 percent* of private companies in Canada, over the next 10 years, this is even more relevant. Here are key reasons why:

• If there is a need for value enhancement before sale to a third party, it will only happen through strong employees who are incented to exhibit the right behaviors to drive direction and goals.
• If a full or partial sale to employees is on the table, those employees need to have clarity around where the business is going and that they can buy into that – literally and figuratively – and see a fair return in investment and job satisfaction.
• The financial and capital needs of the business in the future need to align with the founders’ need to harvest their value from the business. Specifically, there needs to be clarity around how the competition for cash will be addressed.

A clear path means creating a story for the employee which encompasses the future of the company, and their participation in that story.

Sharing ownership doesn’t necessarily mean losing control

Many owners resist considering offering ownership to employees or defer to phantom plans to avoid having to deal with other shareholders. In some circumstances, this is the right approach. However, if you are serious about selling to employees or having employees as shareholders as one strategy to ramp up company value, the risk of loss of control is manageable.

While minority shareholders do have rights, such as access to financial information and some renumeration information, they are also bound by the shareholder agreement. A good agreement, which is aligned with the overall succession planning and objectives and direction of the company, will set out decision making and governance guidelines. These in turn will assure key ownership-level decisions rest with those who are carrying the most risk. 

The upside is that by sharing ownership with employees, an owner can manufacture your own buyer and create / retain a strong committed team to take the business forward.

Time equates to options

Whether from a people, tax, or entrepreneurial journey perspective, the fundamental truth is that starting early not only creates options but allows for adjustments along the way.

The decision around whether and which a profit sharing, employee share ownership plan (ESOP), stock option, or hybrid plan is the right one for your situation will be driven by your goals, timelines, situation, and people. The key is having a plan which will set in place the right elements to move your business to where it and you need it to go. 

For more information, contact Lynne Fisher, National Team Leader, ExitSMART, at 780.401.7085.

*Canadian Federation of Independent Businesses – Getting the Transition Right