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Using Employee Share Ownership Programs (ESOPs) to Maximize Your Value and Your Legacy


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Employee Share Ownership Plans (ESOPs) can provide the foundation for a high performance company by creating an ownership mentality, which improves employee motivation, productivity and profitability. An ESOP can also help a company to recruit highly skilled individuals, retain key employees, maximize commitment to long-term corporate goals and provide employees with a tax-effective vehicle for growing personal wealth.

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Using Employee Share Ownership Programs (ESOPs) to Maximize Your Value and Your Legacy

  1. 1. Welcome <ul><li>Using Employee Share Ownership Plans (ESOPs) </li></ul><ul><li>To Maximize Your Value and Your Legacy </li></ul>
  2. 2. Agenda <ul><li>Dashboard </li></ul><ul><li>Speakers </li></ul><ul><li>Q&A </li></ul><ul><li>Follow-Up </li></ul>
  3. 3. <ul><li>Celine Favreau </li></ul>Project Manager Saskatchewan Economic Development Association (SEDA)
  4. 4. <ul><li>Perry Phillips </li></ul>President ESOP Builders, Inc.
  5. 5. It’s Your Legacy Using ESOPs to Maximize Your Value and Your Legacy Grow Our Region SEDA ESOP Builders Inc. August 23, 2011
  6. 6. Three Key Components to A Business Legacy 1 <ul><li>Exit </li></ul><ul><li>- Getting your money out </li></ul><ul><li>Succession </li></ul><ul><li>- Sustaining the company in the future </li></ul><ul><li>Legacy </li></ul><ul><li>- Preserving the founder’s core values </li></ul><ul><li>1 “The Legacy Problem” by Marjorie Kelly Business Ethics Summer 2003 </li></ul>© ESOP Builders Inc .
  7. 7. When do SME owners plan to exit? © ESOP Builders Inc . Studies conducted by the Canadian Federation of Independent Business with SME owners, June 2005 4,311 respondents - (% of answers, years) 71% %
  8. 8. Why Don’t Business Owners Plan? <ul><li>Not sure how to start the process </li></ul><ul><li>Difficulty discussing financial matters and personal goals </li></ul><ul><li>Spend time “putting out fires” </li></ul><ul><li>Process seems to daunting </li></ul><ul><li>Afraid of what life is like without the business </li></ul>© ESOP Builders Inc .
  9. 9. <ul><li>75% of business owners report regretting selling their business 12 months after the closing. WHY? </li></ul>Most Business Exits Are Failures © ESOP Builders Inc . © ESOP Builders Inc .
  10. 10. <ul><li>Did not plan enough for the event </li></ul><ul><li>Did not understand the process </li></ul><ul><li>Paid too much in tax </li></ul><ul><li>Did not appreciate what retirement would actually be like </li></ul>Most Business Exits Are Failures © ESOP Builders Inc .
  11. 11. Using ESOPs to Achieve Your Goals
  12. 12. <ul><li>ESOP Builders Inc. </li></ul><ul><li>Perry Phillips CA-CBV ASA CEPA </li></ul><ul><li>President </li></ul><ul><li>4646 Dufferin Street, Suite 6 </li></ul><ul><li>Toronto ON M3H 5S4 </li></ul><ul><li>1 (877) 995-ESOP (3767) (416) 645-0512 </li></ul><ul><li>[email_address] </li></ul><ul><li> </li></ul>© ESOP Builders Inc .
  13. 13. WHAT IS AN ESOP? Employee Share Ownership Plan An ESOP is a formal plan made available to eligible employees of a company which allows them to participate in the long-term value growth of the business through the purchase of an ownership interest. © ESOP Builders Inc .
  14. 14. What ESOPs Are Used For <ul><li>Succession Planning </li></ul><ul><ul><ul><li>Immediate </li></ul></ul></ul><ul><ul><ul><li>Long-term </li></ul></ul></ul><ul><li>Attraction and retention of employees </li></ul><ul><li>Reward/incentive – </li></ul><ul><ul><ul><li>improved performance </li></ul></ul></ul>© ESOP Builders Inc .
  15. 15. Family Strategic Buyer ESOP/MBO Refinance Liquidate Institutional © ESOP Builders Inc . ONE SOLUTION OF MANY
  16. 16. WHY USE ESOPs? Employee Share Ownership Plan Success rates of business transitions 30% when sold to family 50% when sold to other companies 80% when sold to employees  Roynat © ESOP Builders Inc .
  18. 18. How You Benefit <ul><li>Flexible timetable for exit strategy </li></ul><ul><li>Allows for family participation </li></ul><ul><li>Creates instant portfolio liquidity </li></ul><ul><li>Increases company productivity, growth and profitability </li></ul><ul><li>Foundation for business legacy </li></ul>© ESOP Builders Inc .
  19. 19. Issues To Consider Pre-ESOP <ul><li>Goals of owner – financial, personal, family, succession </li></ul><ul><li>Role of owner during transition </li></ul><ul><li>Worth of the business </li></ul><ul><li>Relationship with employees </li></ul><ul><li>Ability of employees </li></ul><ul><li>Disclosure of information </li></ul>© ESOP Builders Inc .
  20. 20. Key Factors in a Successful ESOP <ul><li>Vendor must fully support ESOP and willing to disclose to employees </li></ul><ul><li>Key group must be capable and support ESOP </li></ul><ul><li>Must have an acknowledged leader of the key group </li></ul>© ESOP Builders Inc .
  21. 21. Key Factors in a Successful ESOP <ul><li>Participating employees must invest (key and broad-based) </li></ul><ul><li>Employee participation in decision-making </li></ul><ul><li>Manage employee expectations </li></ul><ul><li>Company should have history of success (earnings and cash flow) </li></ul>© ESOP Builders Inc .
  22. 22. Key Factors in a Successful ESOP <ul><li>Independent valuation </li></ul><ul><li>Provide communication, information, training, participation for employees </li></ul><ul><li>Time to properly design and implement ESOP </li></ul>© ESOP Builders Inc .
  23. 23. Stats on ESOPs <ul><li>Companies with highly engaged workforces displayed the following benefits: </li></ul><ul><li>Recruiting – 3.5 times more job applications received </li></ul><ul><li>Turnover significantly reduced </li></ul><ul><li>Productivity – highly engaged employees had 20% higher performance scores compared to the average </li></ul>© ESOP Builders Inc .
  24. 24. Employee Share Ownership Plans <ul><li>WHAT’S NEW </li></ul><ul><li>Survey of 1000 ESOP companies currently shows </li></ul>© ESOP Builders Inc . Bankrupt or about to go bankrupt 1.4% Laying off or planning to lay off 20% or more of the workforce 5.3% Breaking even 17.1% Profitable but with no hiring plans 49.2% Profitable with hiring plans 26.9%
  25. 25. Employee Share Ownership Plans <ul><li>WHAT’S NEW </li></ul><ul><li>In Canada, 40% of </li></ul><ul><li>Profit Magazine’s </li></ul><ul><li>200 Fastest Growing Companies </li></ul><ul><li>had ESOPs </li></ul>© ESOP Builders Inc .
  26. 26. <ul><li>CASH </li></ul><ul><li>PAYROLL DEDUCTIONS </li></ul><ul><li>BONUS </li></ul><ul><li>COMPANY LOAN </li></ul><ul><li>BANK LOAN </li></ul><ul><li>DIVIDENDS </li></ul><ul><li>RRSP POOL </li></ul>EMPLOYEE FINANCING ALTERNATIVES © ESOP Builders Inc .
  27. 27. ESOP TAX STRATEGIES <ul><li>Maximize tax-free Capital Gains to current owners </li></ul><ul><li>Employee Capital Gains exemption </li></ul><ul><li>TFSA </li></ul><ul><li>RRSP </li></ul><ul><li>Canaccord, Olympia Trust </li></ul><ul><li>Saskatchewan ESOP legislation </li></ul>© ESOP Builders Inc .
  28. 28. <ul><li>Creating negative Goodwill </li></ul><ul><li>Lack of interest, trust, structure </li></ul><ul><li>Administrative complexity </li></ul><ul><li>Tax complications for employees </li></ul><ul><li>Corporate restructuring </li></ul>ESOP DOWNSIDES © ESOP Builders Inc .
  29. 29. Ownership Thinking Engaging Employees to Think Like Owners
  30. 30. © Ownership Thinking™ 2011 Ownership Thinking: Moving From Me to Us <ul><li>Paycheck </li></ul><ul><li>Benefits </li></ul><ul><li>Recognition </li></ul><ul><li>Job Security </li></ul><ul><li>Friday </li></ul><ul><li>Work Environment </li></ul><ul><li>Opportunity </li></ul><ul><li>Cash Flow </li></ul><ul><li>Risk </li></ul><ul><li>Revenue Growth </li></ul><ul><li>Market Share </li></ul><ul><li>Economy </li></ul><ul><li>Employee Retention </li></ul><ul><li>Cost Control </li></ul>Employee Owner
  31. 31. © Ownership Thinking™ 2011 The Ownership Thinking Process The Right Measures The Right Incentives The Right People The Right Education
  32. 32. © Ownership Thinking™ 2011 The Right Education: Financial Acumen What your employees don’t know can hurt you
  33. 33. The Three Financial Statements © Ownership Thinking™ 2011 <ul><li>The Income Statement </li></ul><ul><li>The Cash Flow Statement </li></ul><ul><li>The Balance Sheet </li></ul>
  34. 34. The Problem with Financial Statements © Ownership Thinking™ 2011
  35. 35. © Ownership Thinking™ 2011 © Ownership Thinking™ 2010 Copyright Ownership Thinking TM 2008. 303-984-1434, Forecasting with Scoreboards: Exercise
  36. 36. © Ownership Thinking™ 2011 No More Tears <ul><li>Reduce Average Cost per Package from $2.00 to $1.50 </li></ul><ul><li>Move to 70% purchasing from Fresh Mex </li></ul><ul><li>Improve pre-pack inspection process </li></ul><ul><li>Calibrate packing equipment according to new schedule </li></ul><ul><li>Reduce overtime by 60% </li></ul><ul><li>Reduce average set-up time to 30 minutes </li></ul><ul><li>Repair and maintain labeler </li></ul><ul><li>Utilize new scheduler software </li></ul>Objective Actions/People Benefits Celebration Time Frame <ul><li>90 Days Beginning January 1st </li></ul><ul><li>Reduction in total COGs of $800,000 (annualized) </li></ul><ul><li>Increase Profit Before Tax by $600,000 (annualized) </li></ul><ul><li>Increase Bonus Pool by $120,000 (assuming threshold is surpassed) </li></ul><ul><li>Fund new venture in 2 years </li></ul>Cost <ul><li>BBQ and Band </li></ul><ul><li>$1,800 </li></ul>RIP Example: Average Cost per Package
  37. 37.
  38. 38. Mercedes Medical 2010 Impact of RIPs © Ownership Thinking™ 2011
  39. 39. © Ownership Thinking™ 2011 1 st Year Results: Office Furniture Distributor Year Prior to Implementation <ul><li>Sales: $8.5 Million </li></ul><ul><li>Gross Profit: 24.1% </li></ul><ul><li>Profit/Loss: ($395k) </li></ul><ul><li>Profit/Loss %: (4.6%) </li></ul><ul><li>Cash Flow: ($514k) </li></ul><ul><li>LT Debt: $587k </li></ul><ul><li>DSO: 50 days </li></ul><ul><li>Inventory Turns: 15 </li></ul><ul><li>Bonus Payout: None </li></ul>Ownership Thinking Focus <ul><li>Gross Margin </li></ul><ul><li>Profit Before Tax </li></ul><ul><li>Sales Expense </li></ul><ul><li>Install Expense </li></ul><ul><li>Debt Reduction </li></ul><ul><li>Error Reduction </li></ul><ul><li>Estimating Accuracy </li></ul><ul><li>Collections </li></ul><ul><li>Labor Efficiency </li></ul><ul><li>Inventory Control </li></ul><ul><li>Profitable Revenue </li></ul>1 st Year Results with OT <ul><li>Sales: $12 Million </li></ul><ul><li>Gross Profit: 26% </li></ul><ul><li>Profit/Loss: $650k </li></ul><ul><li>Profit/Loss %: 6% </li></ul><ul><ul><li>Ind. Standard: 3.5% </li></ul></ul><ul><li>Cash Flow: $359k </li></ul><ul><li>LT Debt: $216k </li></ul><ul><li>DSO: 29 days </li></ul><ul><li>Inventory Turns: 65 </li></ul><ul><li>Bonus Payout: $3,300 per Employee </li></ul>
  40. 40. Q&A <ul><li>Please send your questions via the Chat or Question widget on your dashboard. </li></ul>
  41. 41. About ESOP and SEDA Contact SEDA for an ESOP Start-up Kit and a copy of the EIP Procedures Manual.
  42. 42. Stay in Touch <ul><li>Thank you for joining us! </li></ul>Celine Favreau Project Managr, SEDA @saskecdevassoc @growourregion @celinetfavreau [email_address] Perry Phillips President, ESOP Builders Inc. [email_address]