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Looking After the Value of Your Business? Start With the Employees

Accredited Advisers

Looking After the Value of Your Business? Start With the Employees

By , September 5, 2019
Leveraged-ESOP_WPGraphic

 

The biggest value in a business is often driven by its employees.  Yet they are often overlooked in an exit scenario.  Sales are planned and deals are struck and the employees are often the last ones to know about it.  What if you considered a different tack?  Here’s 4 tips on getting your employees involved to increase the value of your business:

 

#1:  Look for a potential successor(s) in-house

 

The impending rise in the number of businesses expected to change hands.  The retirement of the Baby Boomer generation means a likely shortage of external buyers for thousands of businesses.  Rather than being forced to close your door and risking the livelihoods of your business’ employees, consider succession rather than sale.

 

Take a moment to contemplate your existing team. Are there individuals within the group that are able to step into your shoes over time?  Have you ever looked at them from this angle before?  It’s worth taking stock before deciding on your exit strategy.  Even if you don’t have what you would consider the ‘right’ employee(s) in-house right now, this perspective can influence future hiring decisions and allow you to broaden your focus.

 

#2:  Consider management buyout (MBO) as an option

 

The succession concept is often applied to exit planning for family-owned-and-run businesses. In this context, a business owner looks to groom a member of the family to take over the reins of the business.  In the longer term a structured transition of ownership is contemplated.

However, succession is available to any number of small to mid-sized businesses that do not have this family orientation. The primary difference is that the structure of the transition is what is known as a management buyout (MBO) or even an employee buyout (EBO), depending on the size, type and appeal of the business.

 

Achieving a successful MBO exit requires careful planning, successor identification, development and, most important, a change in behaviour on the part of the existing owner(s).  Even though the transition of ownership generally takes longer than pursuing a sale to an external party, the existing owner(s) must start the process of delegating and stepping into a non-executive, hands-off capacity from the outset. Failure to facilitate this incremental change could demotivate participants in the MBO and ultimately destroy shareholder value.

 

#3: Include your staff in an Employee Share Ownership Program

 

Locking in key people whilst you build your business for maximum exit value is critical.  One of the best ways to achieve this is via some form of employee participation in sale proceeds.

How motivating would it be for an employee to know that, when the business sells, as has already been communicated, they will receive a lump sum payment as recognition of their contribution to the outcome?

 

Employee Share Ownership Programs – or ESOPs – come in a variety of shapes and sizes. Some involve direct equity ownership.  Others use instruments such as stock options, whilst shadow equity is also a popular strategy.

 

To start planning for an ESOP, think carefully about what it is you want to achieve. How much are you planning to sell for? What percentage are you prepared to dedicate to employee recognition?  What timeframe do you have in mind? Armed with this information, your professional advisors can then help you structure the most effective approach.

 

#4:  Consider the implications of your exit on employees and, by extension, the value of your business

 

In many situations, a business owner’s intention to sell is kept a closely guarded secret, lest word leak out to key competitors, staff, customers and/or suppliers. Therefore, the sale announcement can come as a total shock to these key stakeholders, with varying consequences.

 

Keep firmly in mind that it is not unusual for staff outside the inner circle to feel betrayed by the decision.  This then impacts upon individual commitment, loyalty and performance. This is not an optimal outcome, particularly where ongoing performance is part and parcel of the sale transaction.

 

Poor communication with employees – or lack of consideration of their key drivers – can spell disaster for a sale/acquisition process. Myriad examples exist of en masse departures, poor cultural fit and loss of key clients.  A change in ownership can destroy shareholder value. In many sectors – business and professional services is one – the business IS the employees, so do not neglect them in your planning.  Consider talking to your advisory team to define the most appropriate employee communication strategy.

 

 

 

Christine Nicholson

Christine Nicholson

Partner

Christine is a Chartered Management Accountant with a Law degree who brings 25 years of wisdom, know-how, and experience of working with SME’s. Her long and varied career has included working overseas, rescuing technology companies, building a healthcare business from scratch and running a zoo.

She started her first successful multi-million turnover business in 2002 and has grown business ventures for others including a bankruptcy to 8-figure exit in 18 months. Christine’s engagement consistently gets her clients increasing their turnover with improved profitability and fewer working hours.

She has saved clients thousands and increased the value of their businesses by millions. Since 2008 she has generated over £100m of crystallised value in business exits.

Christine is also an author of 3 books on Finance, Business Management and Technology businesses. She is a seasoned speaker and Professionally Accredited Member of the Association of Business Mentors.