Why giving away parts of your business could accelerate your growth. Seriously!

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By Jason Parks, Director – Strategic Advisory Services, Equiteq.

Equiteq hosted a webinar on why equity incentivizing your key employees can improve equity value. In this blog, we take a look at some of the questions asked by attendees.

  1. I’d like to motivate my Managing Directors, but I’m nervous about giving too much away.

It’s a mistake to simply view equity schemes with key employees as good as giving away your business.  When done correctly, they can help you grow your consulting firm faster, thus increasing your equity value. Think about it: it’s better to own 70% of a $10m business than 100% of $3m company.

Managing shareholder dilution is important, but I would encourage you to first consider how to get your key personnel aligned with the shareholders’ interests and objectives. That starts with having a clear plan in place.

  1. I’m an HR manager for our firm. Our leadership wants to explore giving equity as an incentive. How can I help with pushing an equity incentive plan forward?

This is an interesting question. HR departments can play a tactical role in qualifying candidates for the plan by providing insights on pay rates, success measures and career paths.

HR should take the lead on messaging, participate in evaluating the robustness of the plan and identifying key employees to participate in the equity-sharing scheme. Remember – employees want transparency and solid goals.

Here’s a list of key questions we’ve used to help our clients to identify crucial staff:

  1. What’s their current value to the business?
  2. What is their current compensation?
  3. What else is important to them?
  4. How attractive a hire would they be to a competitor?
  5. What is the likelihood that they would leave?

Depending on the organization, HR might be expected to lead the process entirely. We have seen instances where business owners want their HR team’s input and perspective in the process.

  1. You talked about anticipating buyer retention plans. How do we go about doing that as we are about to sell our business?

The important thing to understand is that buyers are always keen to keep hold of key employees, at least for the earn-out period. So, you can expect buyers to push for a retention program during the due diligence process.

The key takeaway here is that you want to stay in front of any excessive dilution.  We’d advise you to distinguish between employees that are crucial to long-term success or short-term integration. Planning ahead will inform of you of who is likely to want stay on, who might be interested in shares or in cash remunerations.

Note: our research shows that 65% of retention bonuses were paid in cash only. It is important to have an idea of what your retention plan is likely to look like beforehand.

What this question brings up is the importance of getting advice in advance of a sale. You need experts who understand what buyers will be looking for to avoid the missteps that can send a deal sideways.

Finally, here are the immediate steps you can take to put an equity sharing plan in place:

  • Define the purpose for the incentive plan
  • Develop a clear understanding of what a shareholders agreement can be used for, and develop the key themes that will govern shareholder relationships
  • Identify key staff and the criteria used to determine who gets what
  • Obtain a current valuation of the firm
  • Seek advice from experts on shareholders and business strategy

To sign up to listen to a recording of this webinar, please click here. To view other webinars from Equiteq, please click here.

If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.

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