You have worked hard and have a great business. You have found or are looking for more good staff and want to motivate them to help you grow and eventually sell the business.
Following my recent article about selling a privately owned business, it’s time to shine the spotlight on the benefits of employee equity arrangements before the sale of a business.
Alignment of interests and value creation
In my experience, nothing is more effective in engaging people in a business than an ownership stake.
Even a small percentage of ownership of the business by your staff better aligns their interests with yours.
Very quickly, they will be looking for ways to grow revenue, save costs and increase your profit margin. This could be extremely valuable to you and your staff especially if this is implemented a year or more ahead of a sale of the business.
A 50-75% tax discount
As many will know, frequently, if equity in a business has been held for at least a year before it is sold, a 50% discount may apply to the sale profits for capital gains tax. This can be a very tax-effective reward mechanism and this may be reduced by half again for small businesses. Want more information? Click here.
Better still, your staff may be willing to invest some of their savings in your business or swap a pay rise for equity. This may give your business the extra cashflow it needs — perhaps to start a new project that takes your sales to the next level.
Ideas and expectations
In addition to ideas, of course, ownership may also bring expectations. However, you need not hand-over the running of your business or the significant decision making at the same time.
Share and option plans
You may have heard about share and option plans but thought they sounded complex, leaving you wondering if you would be giving away value and making life much more difficult for yourself
Wrong! We see lots of share and option plans even for small businesses. They can be established quickly and be in simple terms and, as mentioned above, they often create value. For example, 90% of a business performing at its highest potential could be much more valuable than maintaining the status quo (or, in other words, 100% of a business falling short of its potential).
Any funding can be provided by staff at the time of their acquisition of the equity (possibly in instalments) or their sale of the equity. Funding for the equity could also be provided by your business by a loan to the staff. This loan could be repaid out of dividends or the sale proceeds of the equity.
In fact, if the staff are nervous about taking a loan, your business may agree the loan is only required to be repaid in these ways and therefore the staff will effectively have no personal liability for the loan.