In uncertain economic times, sharing equity or profits with employees may keep your exit options open

With the pandemic causing an uncertain economic future for many real estate and construction businesses, many owners are assessing their exit options. Some feel tired, some want to take a step back and others are looking for ways to reduce the risk of their investments in their companies.

If you want to attract and retain the best talent, sustain transferable value, and perhaps even sell your business in the future, there are a couple of appealing strategies that you may wish to consider.

Employee profit sharing plans (EPSPs) and employee share ownership plans (ESOPs) are customized programs that add value to a business, build equity for retirement, and deliver more options for a future transition.

An EPSP allows some or all of your employees to share in the profits of your company while an ESOP provides them with an ownership interest. Both types of plans connect employee efforts directly to business results, helping to drive company performance and value. Both plans also enable you to transition out of your business on your own timetable and your own terms while retaining control until your departure.

ESOPs and EPSPs are particularly helpful if you want to realize top returns from a sale to a buyer. Involving employees in profit-sharing and ownership is seen as a valuable tool by future buyers as well as by your employees.

Here’s an example of how they work: The owner of a distribution company with 40 employees hoped to retire within the next five years. He wanted to protect the long-term future of the company and realize a good profit from its eventual sale. However, given his industry and company location, he anticipated that it would be difficult to find an outside purchaser for the business.

He approached his management team about buying the company. They liked the idea but lacked the funds. To address the issue, the owner set up an ESOP. In consultation with MNP’s SMARTshare team, they evaluated the many forms ownership interest can take — equity shares, share options, and stock appreciation rights. Regardless of the form, these methods enable employees to share in the risks and rewards of company ownership.

In this particular situation, the plan enabled the managers to purchase company shares with their performance bonuses over a number of years. Having an equity interest in the company motivated the team and business productivity and corporate value grew.

Within a few years, this company shifted from an owner-managed to an employee-managed business. Having achieved his financial goals, the owner was able to transition into retirement with more available funds. He was also pleased to leave his company in the hands of a capable team that would continue his business legacy.

For owners who want to build equity for retirement, with flexibility regarding how and when you exit your real estate or construction business, ESOPs and EPSPs can offer reassurance and security. This is compounded for owners who are uncertain whether they’ll be able to find an outside buyer for the company.

At the same time, third-party buyers are also attracted to companies with ESOPs or EPSPs in place.  Since these programs help to develop loyal and capable teams that propel business priorities and build strong, sustainable enterprises, they can be a valuable asset.

Should you decide to sell to a family member, having an ESOP or EPSP plan in place makes it easier to access capital to grow the business.

If you have not yet done so, consider an eventual sale of the business to your managers and employees as another succession strategy that will help you as owner, as well as your employees.

Contact us

To learn how these plans could fit your business exit plans, contact Eben Louw, CPA, CA, Partner, at 604.870.7413 or [email protected]