When it's time to exit your business, an employee share ownership plan can help smooth the transition.
It may also boost the company's bottom line,
BY NICK ROCKEL
Although Ted Chant hasn't named his successor, he's busy ensuring that the company he founded in 1998 ends up in good hands. Two years ago, the president and CEO of Aurora, Ontario-based Chant Construction Ltd. took the first step in this transition by pledging to introduce an employee share ownership plan (ESOP). Chant turned to ESOP Builders Inc. of Toronto to help him draft the plan, which he describes as a cornerstone of his succession strategy. At 52, Chant has set a five-year horizon for exiting as president of the 48-member firm. "We may promote somebody from within or we may go outside," he says, adding that he wants to stay involved in the company, perhaps as chairman.
Unlike many Canadians at the same crossroads, Chant is confronting his eventual succession. According to a 2005 survey by the Canadian Federation of Independent Business, four out of 10 owners of small- and medium-sized businesses planned to exit within five years. By 2015, the CFIB found, that number will jump to seven out of 10 owners. However, just 35 percent of the 4,300 survey respondents were working on a succession plan-and most people with a plan had nothing in writing. "There is a real fear to address this issue," says ESOP Builders president Perry Phillips. "It's the rare person that takes it head-on and says, 'It's in my benefit, it's in the benefit of my family and it's in the benefit of my company to look at when I have to leave.' "
Since 1994, ESOP Builders has represented some 60 companies, 80 percent of them small businesses with between 25 and 150 employees. Phillips explains that an ESOP can be broad-based or involve just a few key people. Chant is going broad-based: he will make 30 percent of the company available to employees over the next three years, and plans to sell 70 percent within five years.
Why is Chant doing an ESOP? After spending most of his career in an employee-owned environment, he enlisted ESOP Builders to improve on an earlier and less transparent ESOP. Noting that participation is voluntary, Chant says the plan isn't a cash grab. Instead, he calls it a retention tool that will buy stability and commitment during the transition. "I see it as being a differentiator from our competition, and a way to capture the entrepreneurial spirit of everybody," he says. A 2000 Rutgers University study compared six years of sales data for 65 ESOP and non-ESOP companies. Post-ESOP, the former group's annual growth in sales per employee was 2.3 percent higher-an impressive number when projected over 10 years.
The Chant Construction ESOP includes three annual business valuations by ESOP Builders. According to Phillips, third-party valuation is critical to a succession or exit plan. Without it, owners may assign the company a value based on their own needs rather than financial reality. In the case of Chant Construction, independent valuation will give shareholders a clear picture of what their stake in the private firm is worth.
Family-business owners can also use an ESOP to weigh their succession options, Phillips says. ESOP Builders worked with a sole proprietor who had a son in the company and wanted to exit within five years. The owner established an ESOP for his son and several key people, but he also brought in an outside board of advisers to oversee the business. When the five years are up, he will choose a successor. "It gave him time to assess how the [key] people were going to react to his son, and also to see how his son would react to the other people," Phillips recalls. The ESOP encourages entrepreneurial staff to stay with the company and non-entrepreneurial staff to leave, he adds. And because they have an equity stake, employees with ownership ambitions are more likely to speak up, giving the boss a chance to see what kind of leaders they are.
But ESOPs aren't always the solution. Another ESOP Builders client is a manufacturing firm with two owners, one of whom installed his daughter as president. This move caused so much friction that the company has shelved an ESOP in favour of a sale.
During any transition, Phillips urges clients to appoint an arm's-length advisory board. Ted Chant is still assembling his, but he's already covered another crucial angle. If he's disabled or killed, an emergency-response plan gives his wife-Chant Construction's other beneficial owner-choices such as wrapping up the company or turning it back to the employees. That level of readiness puts Chant in the smart minority as he prepares to relinquish majority ownership.