Three steps to avoiding conflict with fellow engineering partners

In the last of our three-part series, we examine how to keep the peace in Employee Share Ownership Plans (ESOPs) as they become more popular among Canadian engineering firms.

Having the right Employee Share Ownership Plan (ESOP) in place at your engineering firm involves a lot more than agreeing to a few terms and signing on the dotted line.

These complicated and impactful plans can come with significant risk if not done properly or if they don’t reflect the needs and goals of the people involved.

To avoid conflict throughout the process and in the long term, after the plan is implemented, there are three things to consider that will go a long way in ensuring everything goes smoothly.

1. Build a thorough and thoughtful shareholder agreement
   • The time spent working through the key parameters of owning a business together will both create long-term harmony and help in times of conflict. Steer clear of vague or impractical language that doesn’t get into the specifics of the deal or fails to account for the many variables at play. The plan is meant to offer guidance and direction in specific circumstances and should therefore leave little to no room for interpretation around the key questions that may arise.
2. Prioritize consensus on strategic direction
   • This point is routinely one that causes the most disagreement and conflict within ESOPs at engineering firms. It’s vital to agree, and set parameters, with everyone involved on where the company should go and what goals everyone wants to achieve. Some people may want to invest in new markets, projects, or strategic initiatives. Others, such as the majority shareholder, may disagree and prefer focussing on de-risking the business or paying dividends. Having these conversations early, and getting them down on paper, is vital to set realistic expectations for the future of the firm and the business ventures that will be undertaken. It will impact how profits and cash are spent and will likely have a large impact on any dividend decisions.
3. Avoid financial surprises
   • If the company isn’t performing as well as hoped, people may look to place blame. On the flip side, if the firm is doing well, issues may arise over who is perceived to be contributing the most and therefore entitled to the most reward. Effective and ongoing education on financial concepts and literacy are critical to ensuring that everyone is on the same page when it comes to allocation of profits and other financial decisions. Further, for an ESOP to be successful, there must be a solid plan that includes regular communication where everyone gets transparent updates on the financial health of the firm.

These points are just a few of the many ways to avoid conflict in an ESOP. It’s important to note that depending on your firm’s structure and internal operations, there may be more efficient ways to ensure a transparent, realistic, and conflict-free plan.

Speaking with an MNP advisor will enable you to see where there may be more areas to consider solidifying or amending. This can also help you determine how to best approach a holistic and mutually beneficial ESOP throughout the planning process and well into the future.

Other considerations in development and maintenance of a successful ESOP

Preventing disputes, or worse, court proceedings, in an ESOP is only one part of the equation. While it’s important to protect the integrity and future of your firm, and your stake in it, it’s just as crucial to make a commitment to the ongoing development and evolution of the plan.

By taking concrete steps to assist in the development of your team, you can create the trust needed to see an ESOP through to completion, whatever that looks like for your firm.

Consider these three elements to a successful ESOP and how you might integrate them into your new or existing plan:

• Modelling: This point is vital in the planning process as it helps identify key issues that may arise. Working with an MNP advisor, modelling, and crucial conversations can assist in tracking what the outcomes and consequences of acting or not may have on the firm as a whole. This will help everyone see how different scenarios could impact the company and them personally. It will also go far in helping manage expectations and create a realistic view of the firm’s future.
• Education: Education must be ongoing. Shareholders entering or exiting ownership need to understand the reasons why the numbers are a certain way or how the value of the business was determined. This goes hand in hand with the valuation process, a vital step in ESOP development to ensure smooth transitions and a joint understanding of the firm’s financial standing.
• Governance: When it comes to making decisions, ensure they are being made by the right people at the right levels. You don’t want a one percent shareholder making million-dollar decisions in isolation. There needs to be a structure for decision making that fits with the impact of those decisions and is representative of the established structure of the firm itself. This includes up-front conversations around compensation and confidentiality of key information.

Take the next steps

An ESOP is a valuable tool; an asset that can help secure the successful future of your firm for decades to come. It is worth it to put the hard work in and do it right from the outset. Doing your due diligence and having a team of trusted advisors by your side when making important and long-lasting decisions will ensure you’re meeting your needs and the needs of the firm.

If you’re thinking of developing an ESOP or already have one in place but need some advice, contact Lynne Fisher, National Team Leader, SMART Services at [email protected] or Dany Le, Partner, Valuation and Litigation Support Services at [email protected].