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In MNP’s Consulting Services, we are often presented with a client who is faced with issues related to employee recruitment, retention and motivation. For private companies, an employee share ownership plan (or ESOP) provides an avenue that allows employees the opportunity to participate in the successes of the company and can be a great motivational tool. Ill-conceived or poorly executed plans, however, can have the opposite effect as poor communication, a lack of understanding of the arrangement and ambiguously written agreements can all result in disputes and bitter feelings.
In the right circumstances, a company can enjoy a highly-motivated workforce and perhaps even a succession plan for the current owners under an ESOP. For high-growth companies, share-based compensation can also help preserve critical cash by converting a portion of employee compensation to shares.
In Canada ESOP can be used to describe any plan that gives some type of participation in the equity interest of the company. This is different than in the U.S. where the ESOP can refer to specifically qualified plans under the U.S. Internal Revenue Code.
Participation can take several forms, including:
While any of these options may meet your needs, each plan has its own advantages and disadvantages that should be discussed with a trusted advisor. There are a number of considerations business owners will want to factor into their decision on whether to proceed.
Companies with an ESOP had the following characteristics, according to a study performed by the Toronto Stock Exchange of Canadian companies comparing public companies with an ESOP to companies without an ESOP:
While there are observable benefits, prior to embarking on a plan, the company will need to assess whether an ESOP makes sense in their situation. Some of the significant considerations include:
With the lack of an active market for the shares or options, the company will need to have a mechanism in place to value the shares for incoming and departing shareholders. A shareholders’ agreement is required to define the shareholders' rights, privileges, protections and obligations. With respect to valuing the shares of the company, the shareholders’ agreement would need to address certain items, such as hhow often will the shares be valued - on an annual basis, upon a triggering event?, and will considerations be given for minority discounts?
So, while there are some clear, observable benefits to setting up an ESOP, each situation is unique. Having your experienced, MNP advisor working with you from the assessment phase through to implementation and with on-going maintenance will help you deal with the complexities and risks, and position you to meet your goals.
For more information on how MNP can help, contact Trevor Kawka, CPA, CA, CBV, CFA, at 403.537.7678 or [email protected].
Related Topics:Employees; Valuations; Retirement; Business Structures
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