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Your Construction Company – Employee Share Ownership Plans and Profit Sharing

2020-11-26


Building Resilience, and Bench Strength for Changing Times.

It’s no secret Canadian construction companies are experiencing change at an unprecedented pace – fueled by almost daily shifts due to the impact of COVID-19, compressed margins, an aging workforce, and bidding processes,

ESOP

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 generation is demanding a clear career path, a more collaborative work environment, more information, and more work / life balance, and this trend will only continue.

In fact, the battle to attract and retain capable, motivated people – of any age – remains a challenge, even in today’s complex environment. This is where employee share ownership plans and profit sharing can come in.

The road to employee ownership

There are a number growing concerns are common to construction business owners, including challenges such as:

  • How can we retain our brightest and best people? The need for capable people who can bring value to our business is more important than ever 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

Consider the following when planning your future and the future of your business:

  • 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 the 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 from moving to competitors? Transition out of your business?
  • 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.
  • 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].