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Your Construction Company and Employee Share Options

20/01/2020


What happens when the experienced “old” is replaced by a more demanding “new”?

It’s no secret Canadian construction companies are experiencing change at an unprecedented pace – fuelled by (among other factors), changing building standards and bidding processes, compressed margins, and an aging workforce

At the same time, a seismic demographic shift is taking place. Millennials will soon overtake Baby Boomers as the largest generation in the Canadian workforce – with qualities and work styles that may differ from their predecessors. This new generation is demanding a more collaborative, more participative work environment, and it is expected that this trend will only continue.

In fact, the battle to attract and retain capable, motivated people – of any age – is a challenge, particularly in regions where construction activity is robust. Add evolving building and environmental standards, applications of so-called smart technology and the additional intricacies in acquiring contracts and you have an increasingly complex business environment.

The Road to Employee Ownership

A number of these growing concerns are common to construction business owners, including questions such as:

  • How can we retain our brightest and best people? The competition for talent in our industry is really intense right now and I want to make sure that we are able to maintain strong bench strength.
  • We would like to share some of our profits with our people in a way that makes sense – tied to the real performance of the company. How do we do this?
  • We need to develop more training time and invest in our upcoming leaders to increase the likelihood of them staying with us.
  • All of the goodwill in our business is in our people and so it’s possible our employees could buy all or parts of the company one day. How do we do that in a way that makes sense and we still retain control?

Three Key Questions to Ask – and Answer

Try to focus on solutions based on the answers to three distinct questions:

  • How do you share profits with your employees?
  • How do you share more ownership and value with your employees?
  • How do you share future growth with your employees?

The answers to these questions will vary depending on your business and owners’ objectives, but foundational to any situation are a few key considerations:

  • What are your objectives for a profit sharing or employee share ownership plan (ESOP)? For example, are you attempting to attract new talent? Keep strong employees? Transition out of your business?
  • Is your focus on sharing profits with your existing and future employees? Or is it only on current employees?
  • Would you like to share profits with all your employees, or just a certain group? Some companies only want to share with their key employees, while others prefer to share with all their employees and the reasons for doing so vary greatly.
  • How closely should profit sharing be tied to corporate performance? Are the leaders willing to develop a profit-sharing system that are closely tied to specific performance areas, or is the sharing more subjective?

It is possible to combine these outcomes and develop a system that answers all the questions, but any solution, no matter how complex or simple, should specifically address these questions

Tips for a Successful Transition

Employee ownership programs can be autonomous or combined with profit-sharing programs. Generally, they allow for all or only certain qualified employees to become direct owners in the company. Critical factors which lead to successful ESOP’s include:

  • Having a culture, or being willing to develop a culture, whereby decision making is decentralized and management is engaged.
  • Creating an ownership structure which allows for employees to share in the growth of the company, without owners needing to give up control.
  • Creating a program that acts as a catalyst to drive corporate growth and provides employees with the ability to say, ‘we are doing this together’ instead of ‘I am doing it for them.’ This is a major benefit of employee ownership.
  • Developing a flexible ownership structure from the outset that can evolve with the needs of the business and the owners. In this way, ownership could eventually shift entirely to employees along a clear, pre-determined plan.
  • Having a system and methodology for how employees will be able to obtain their shares. Will they have to pay full market value for such shares or a discounted value? Will the full purchase be made immediately, or be done over time? Will a bonus system be used to help employees pay for their shares, or do they have to come up with the funds themselves? Are the owners willing to help employees buy in or not?
  • Having in place an educational program to help employees understand how the plan, and ownership, work. For example, not all employees are able to distinguish clearly between their future rights as minority owners and simply remaining good employees and focusing on their day to day responsibilities.

Both profit and ownership sharing programs have enormous value in the right situations. Spending the time upfront to plan and clarify the needs of the business, its owners and employees, will go a long way to help develop a structure and implementation plan that makes the plans successful.

For more information, contact Eben Louw, CPA, CA, Partner, Business Consulting, Assurance,  at 604.853.9471 or [email protected]