Too often, employee stock options and similar ownership plans are put into the wrong hands for the wrong reasons. The result: these plans may infect your business and may be undetectable until a downstream leadership or capital event.
A new client asked us to help administer their new management buyout plan crafted by very qualified attorneys. Our review shocked her. I pointed out that her management buyout ("MBO") plan directs 60% of succession capital to the IRS and only leaves 40% for her. Unfortunately this outcome is all too common.
Public company equity-based pay practices, such as stock grants, restricted stock, and employee stock options are often a poor fit for private companies committed to rewarding leaders for performance, growth and capital succession.
"I am going to make you a 20% equity partner." These are some of the sweetest words that a 2nd in command will ever hear. Unfortunately, this could also be the beginning of the end. In many cases, the cost of transferring equity can starve the company of growth capital.
Want to double the value of your business? Bain Consulting says: work first on building customer loyalty. The benefits: retain the lifetime value of a customer, reduce customer acquisition cost, reward yourself via higher margins from loyal customers. Customer loyalty is why AT&T, Subway, Nike, and Costco dominate their respective niches.
Conventional wisdom is that an ESOP is almost always inferior to a strategic sale. The common view: an ESOP (Employee Stock Ownership Plan) provides liquidity at a painful discount. Real owners sell to strategic buyers, financial buyers or executives. Only the desperate use ESOPs. Conventional wisdom can be a blunt object. The truth: the ESOP option can be a truly competitive choice for owner liquidity and value.
Private equity Groups (PEGs) have a very successful model. Leverage access to equity and debt capital and acquire companies with lots of upside potential. Bring in proven, value-centric management to create material equity value via organic and M&A growth. All this with a single focus in mind: exit to pay back its investors.
Owners of professional services firms (engineering firms, consulting firms, etc.) have a critical choice: Decide what type of business they want to be in the future. Do they want to be a “band of experts” where most of the company value is in the expert? Or do they want to create a true collaborative firm with material value beyond the expert? This is not a trick question.
A building contractor granted 10% of the company to a newly promoted COO. Given its large accounts receivable balance, the company had to borrow nearly $2M to cover the taxes on this grant.
Founders who still own and run their businesses may bring on executives to get to the next level and/or to free themselves from being a slave to their success.