Top five benefits of Employee Share Ownership Plans for engineering firms

How to use ESOPs to attract and retain employees while boosting competitive advantage

In part one of this three-part series, MNP’s Lynne Fisher and Dany Le explore the benefits of Employee Share Ownership Plans (ESOPs) for engineering firms.

An engineering firm’s most valuable asset is its people. But with qualified engineers in short supply, and a significant amount of Canadian business owners set to retire in the next decade, building an attractive business that will draw in talented people and make them want to stay is more important than ever.

More and more, employers are not only looking for engineers for their future succession plans but they’re also considering whether offering ownership to employees is right for them, as a critical retention measure.

With an Employee Share Ownership Plan (ESOP), engineering firm owners have the ability to increase the value of their business and set it up for a sustainable and successful future.

ESOPs are a unique tool that have many benefits in the present and further down the road. By developing and implementing an ESOP, engineering firm owners are able to work closely with the employee(s) who might take over the business in the future, they can protect local and regional jobs, and create economic resilience.

Here are the top five benefits of ESOPs:

1. Connects employees’ behaviour and goals to the company’s
   • When employees are also shareholders, they’re able to see that the better the company does, the better they do, connecting them to enhancing the growth and goals of the company and promoting the best interests of the business.
2. Succession
   • Putting in place a minority shareholder group could allow for a buy-out of the larger shareholders over time. If you’re looking to leave the business in the next five to 10 years, giving people a share in the ownership over time can provide them experience in making owner decisions and enable them to benefit from the risks and rewards.
3. Attraction and retention
   • As more junior engineers leave firms because of a lack of opportunity for meaningful growth, having a strong ESOP gives them a future with the business to look forward to and provides direct benefits for and from the growth of the company moving forward.
4. Creating career paths
   • With ESOPs, you can bring in new engineers and enable them to map out their career in your business to give them something to work towards: the promise of growth and potential partnership or ownership in the future.
5. Competitiveness
   • With an ESOP that prioritizes the company growing together, the chances of being able to secure work and recognize business opportunities go up. You’ll also be able to manage that work more effectively and efficiently.

What makes an ESOP successful?

While it’s true that employee-owned companies grow faster and are regularly more profitable than their peers, it’s vital to have a solid plan to ensure long-term success.

Working with a professional advisor and team to map out your goals is key to understanding what the most realistic path forward is for your business.

There are a few key questions to ask yourself before embarking on the journey to develop an ESOP.

• What are your objectives?
  • Are you aspiring for growth? Do you want to retain the best people? Are you preparing for and acquisition or exit?
• Who is eligible to participate in the program?
  • How will people get in and out and crucially, at what company value?
• What’s the risk and what’s the potential?
  • Do you know your capabilities to not only create but also help sustain an ESOP?

Asking questions like these, among others, will help you determine what a successful plan looks like for your unique situation.

On the flip side, poorly crafted ESOPs lack clear objectives and often create confusion and unexpected tax consequences. Having no clear valuation or shareholder agreement when the plan is triggered poses a significant risk if not done effectively and with your goals in mind.

By aligning your business objectives, employee expectations, and governance with the ESOP, there won’t be any surprises when it’s introduced and implemented, and you won’t miss out on talent who have what it takes to take over when the time comes.

How MNP can help

While the process and how long it takes will vary depending on each firm, there are a few universal steps that a financial advisor will take you through when developing an ESOP.

• Deep dive into objectives - history, strategic direction, financial performance, current structure
• Build foundational pieces and map out potential
• Run through different scenarios and options for how the ESOP could work
• Refine as needed throughout the process
• Full implementation – tax structuring, working with lawyers on legal documents, governance structure, etc.

Taking the time to work with an advisor to put together a comprehensive and thoughtful ESOP comes with a wealth of benefits for any engineering firm. If you’re looking to grow your business and safe guard it for the future, an ESOP might be the right choice for you.

For more information on how to turn your ESOP dreams into a reality, contact Lynne Fisher, National Team Leader, SMART Services at [email protected] or Dany Le, Partner, Valuation and Litigation Support Services at [email protected].