You have more succession planning options than you think

Employee profit sharing and share ownership plans could be the answer
Editor's Note

This article is sponsored by MNP. 

Many business owners have concerns about their eventual business exit. Specifically, they wonder whether they’re doing enough to build business value right now – value that will, one day, allow them to comfortably move onto the next phase of life. If you find yourself in this situation and are looking to take action, now’s the time to explore your options. Employee Share Ownership Plan (ESOP) or Employee Profit Sharing Plan (EPSP) – or MNP’s SMARTshare – may be the answer to your question: What is the best option for me to exit my business on my terms?

MNP’s SMARTshare is a powerful solution to help private enterprise clients drive business growth and performance while also building equity for retirement. Leveraging the strengths of EPSPs and ESOPs, SMARTshare enables business owners to acquire and retain talented employees, optimize their potential and deliver rewarding succession options.

This powerful program allows employees to share in the profitability or growth – or acquire an ownership interest in your company. It can take a variety of forms – such as equity shares, share options, profit sharing or some combination. Ultimately, the basic premise is the same; it allows some or all your employees to share in the rewards and risks of the business.

How ESOPs and EPSPs can help with succession

First, it can help attract, retain and motivate key employees today and into the future; to ultimately boost productivity and efficiency. Additionally, it can help develop a culture where decision-making is decentralized, the team is engaged and focused on the key objectives and direction of the business. Beyond allowing you to drive corporate growth and employee buy-in, it also lets you create a flexible ownership structure that evolves with your employees’ needs along a clear, pre-determined path.

All of these benefits increase the value of your company – and this higher value may help you attract a higher price if you sell your business to an external third-party buyer. Alternatively, should you choose to sell your business to a family member, it makes it easier for them to access capital to grow the business. If you attract the right employees through the ESOP and EPSP programs, you might even sell the company to a competent manager or management team.

A closer look

To get a better understanding of how such a program can strengthen your exit strategy, consider this example:

ABC Company wanted to set up a retirement plan for its five founders who were planning to retire, at different times, over a span of 10 years. These five owners were looking for a way to fund their next stage of life, while simultaneously transitioning ownership to a new group of people.

The model they ultimately settled on was fairly common – they decided to sell 90 per cent of the shares to three key managers, then offer another 10 per cent to selected employees under an ESOP holding company. The ownership team decided to offer shares to employees who had achieved a pre-determined position of responsibility within the company, thus demonstrating a certain level of leadership. To qualify, employees had to have been with the company for at least two years (to indicate stability).

The employees contributed 25 per cent of the share value in cash — which was critical, since the founding owners needed to be paid out. The remaining 75 per cent of the share purchase was financed by an outside lender.

Thanks to this SMARTshare structure, the company achieved a smooth ownership transition while retaining its best employees and securing immediate financial benefit for the founders.

Start with knowing what you want

The most effective profit sharing and share ownership plans are built on a foundation of focused objectives.  If the goals and direction for the business are clear, employee ownership and or profit sharing can be designed to act as a “magnet” for driving behaviours and decisions.

Make sure you take time to consult both owners and employees throughout the SMARTshare design process and clearly outline share ownership eligibility. Other key considerations you’ll want to pay attention to include: desired level of participation for each type of employee, methods that will be allowed for entering and exiting the SMARTshare, SMARTshare education programs and any special incentive programs.

Doug McLarty, FCPA, FCA, CFP, ICD.D, TEP, is a partner with MNP’s Succession Services group with over 25 years of industry experience. If you are interested in what succession options may be available to you, contact Doug at 613-691-4200 or doug.mclarty@mnp.ca