Maximise Business Value:Employee Share Plans as a

Succession Tool

Craig West

Did you know?

Baby Boomers – the 18 year wave

51%of business owners plan to use their business as their primary source of funding retirement

43%aim for a lump sum and a third expect an ongoing income stream

The average age of a family business

owner is 56 years.

55%of all firms plan to recruit in the next 12 months (competition for talent will increase)

61%would seriously consider selling if approached.

31%of retired business owners do not have an adequately funded retirement.

Why Succession Planning?

55% of all business exits are due to death, disability,

bankruptcy, receivership,liquidation or simply closing

the doors.

$213b in US ESOP’s

Of the estimated $8 trillion of corporate equity in

the United States, employees own about $213

billion through ESOPs and

similar stock plans

11,500 companies &9m employees

In the United States, more than 11,500

companies have an ESOP covering almost 9

million employees.

8-11% Faster Growth

ESOP companies that combine employee

ownership with a participative management

style grow 8-11% per year faster than they

otherwise would have.

Clegg in employee ownership pushWednesday 4th July 2012

Nick Clegg has announced plans for an Institute for Employee Ownership

The Government has announced moves to promote employee ownership and make it easier for people to run their own business.

Deputy Prime Minister Nick Clegg said he wanted employee ownership to be normal, rather than a “eureka” moment. He told a summit in London that he supported a culture shift to help people become their own boss.

Competitive Edge “People are definitely a

company’s greatest asset. It doesn’t make any

difference whether the product

is cars or cosmetics. A company is only as good as

the people it keeps”

- Mary Kay Ash

Performance Examples!Year 1 Year 2 Year 3 Year 4 Year 5

Net Profit (average improvement)

55% 51% 35% 40% 43%

Staff Turnover (as a percentage of total employees)

13% 10% 6% 6% 4%

Absenteeism (average days per employee)

5 3 3 2 2

What are you telling your staff by the way you pay

them?

Rewarding key people who are already

collaborating to drive the business!

Base Remuneration • Salary & Wages• Other benefits

Short Term (annual bonus)• Cash bonus• Commission • Cars• Fringe benefits• Entertainment• Income Continuance Policy• Other benefits

Long Term (loyalty) bonus • Retained Bonus• Equity Savings Plan• Equity• Shadow Share Plan• Replicator Plan

Key people as business owners?

“Employee ownership is world changing. It is the way ahead…in the global economy. It reflects that human capital is becoming more important than physical assets…The global economy will succeed when employees feel a stake in the business”

Gordon Brown MP – Chancellor of the Exchequer

Sharing the Profit

“The truth is that all profit sharing doesn’t create

employee involvement – it requires it.”

- Ricardo Semler

Ladder to Equity

1. Employee – earning income (salary/wage/hourly rates etc. ) – this is where most employees sit ( and stay ).

2. Income model – the first step on the ladder then is to boost that income and this is quite common – we often see companies paying bonuses, commissions on sales, incentives etc. to increase an employee’s income

3. Profit share – most equity plans begin with this simple step and

in fact many end at this step – simply providing a share of profits to employees is a great additional incentive as they are directly rewarded as a result of the financial performance of the company in the same way that a business owner typically would be.

4. Equity – whilst there are many equity plans available our

Peak Performance Trust provides a formal structured mechanism to incorporate stages three, four and five into any business succession plan - this allows employees to transition into an equity ownership position within the business they work for.

5. Control – often this step is never utilised though on occasion

has substantial benefits in terms of succession not only of business management but also ownership. Ultimately control means that employees can be transitioned through the earlier four stages and end up in a position of control – this may be that they take over general management or CEO of the company, it may be that they end up with a seat on the board at some future date however this step is not to be rushed

Extra Profit Share 20%

Target Profit

Current Profit

Your company Peak

PerformanceTrust

Shareholders

Company

Participating Employees

Peak Performance

Trust Shares in Company

extra profits

Peak Performance Trust – Stage One

Shareholders

Key Employees

Existing Company

Co-Trustee

Peak Performance Trust

Peak Performance Trust – Stage Two

Shareholders

Key Employees

Existing Company

Co-Trustee

Peak Performance Trust

buys equity

profit share% $

unit holders

Identify key employees and KPI’s

Financial Modelling

Employee Education

Introduce the PPT

Integrate the PPT

Ongoing- Communication and Management

Creating an Organisation of Winners

ENTITLEMENT FEAREARNING

I HAVE IT COMING

I DID THE BEST I COULD

I LIKE THINGS JUST THE WAY THEY ARE

HAVE YOU THOUGHT IT THROUGH?

LET’S GO FOR EXCELLENCE!

SHOOT FOR THE BIG ONE!

YOU CAN NEVER LET UP

WATCH OUT!

MAKE ME SAFE

LowHigh

High

From Danger in the Comfort Zone, by Judith Bardwick

Motivation is highest when the probability of

success is 50%

The Three Characteristics of the Best Companies

• Have fun

• Really care:About each others, customers, suppliers

• High expectations of performance:From within the team, not just top-down

The Ownership Thinking Process

The Right PeopleVALUES

PUPPIES STARS

TERRORISTSDOGS

PERFORMANCE

The Right People

Ownership Thinking cultures retain

employees at a 200% better rate than

non-engaged cultures.

(www.nceo.org)

The Right People

Unlike many companies, we practice: “adequate performance gets a generous severance package.”

The Ownership Thinking Process

What your employees

don’t know can hurt you

How to Effectively TeachFinance to Employees

Paycheque Bills Savings

Revenue Expenses Profit (Loss)

Everyone Can Create Profit

SALES

- EXPENSES

= PROFIT

The Ownership Thinking Process

The Right Measures: Keeping Score

The problems with financial statements:

• Too Complicated• Too Late• Too Disconnected

Scoreboards & ForecastingProTech Inc. Scoreboard Plan Forecast ActualSusan Existing Client Sales 700,000$ Calculation Existing % 93.33% #DIV/0! #DIV/0!Tom New Client Sales 50,000$ Calculation New % 6.67% #DIV/0! #DIV/0!Calculation Total Sales 750,000$ -$ -$ Alex Direct Labor 400,000$ Calculation Gross Margin 350,000$ -$ -$ Maury Overhead 250,000$ Calculation Profit Before Tax 100,000$ -$ -$

Maureen % Non-Owner Sales 80%Linda # of Qualified Leads 60Cydny Close Rate 35%Frank # of Active Clients 16Felix Billable Hour % 80%Tony Average Markup 57%Greg Average Collection Days 40Tonya Number of Open Positions 2Chad Customer Service Score 95%

Cascading• Mission• Vision• Strategies

Strategy Plan Forecast ActualBob Sales 1,650,000$ 1,720,000$ 1,728,000$ Bill Direct Labor 650,000$ 670,000$ 668,000$ Ann Materials 450,000$ 445,000$ 440,000$ Calc. Gross Margin 550,000$ 605,000$ 620,000$ Todd Overhead 400,000$ 400,000$ 396,000$ Calc. Profit Before Tax 150,000$ 205,000$ 224,000$

Bill Average Cost/Package $1.50 $1.58 $1.54Doug Discounts/Returns 1,500$ 2,200$ 2,260$ Sally On-Time Delivery % 95% 96% 97%Adam Sales Per Staff Hour 10,500$ 9,550$ 9,362$ Todd Average Collection Days 40 38 37Ann Inventory Turns 7 7 6

NAME KPI BUDGET FORECAST ACTUAL

Tom Overtime $600 $450 $438

Allan Packaging Waste 250 lbs 290 lbs 310 lbs

Phyllis Product Waste 500 lbs 820 lbs 730 lbs

Tom Avg. Set Up Time 50 mins. 40 mins. 40 mins.

Allan Packages/Hour 1700 1550 1620

NO MORE TEARS

ObjectivesActions &

People Financial Benefits Prize

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LeadershipScoreboard

DepartmentScoreboard

RapidImprovement

Plans

Medical Supply Distributor Impact of RIPsQTR Name Objective SavingsQ1 The Vendor Love Boat Reduce junk fees, take all discounts, 30,000.00$ Q1 Sizzlin Samples Reduce Samples expense and Sample Freight 12,000.00$ Q1 Mercedes Drives 100 Add 100 new accounts per month 11,954.00$ Q1 Returns of the Jedi Reducing customer returns 15,000.00$ Q1 It Aint Easy Being Green Reducing carbon footprint 5,000.00$ Q2 CPR Flatliners Reduce customer attrition 15,325.00$ Q2 The Terminator Paperless Picking and Packing in warehouse 5,400.00$ Q2 Deal or No Deal Reduce Variouse Operating Expense 17,500.00$ Q2 UP (a catalog adventure) Obtain vendor sponsorships for ads in catalog 41,000.00$ Q2 Credit Casino Royale Reduce Customer Credits due to order error 12,500.00$ Q3 The Matrix Increase Web Sales 54,000.00$ Q3 No Going Postal Invoices via Fax or Email - Reduce Postage 441.76$ Q3 The Three Amigas Upselling customers during order taking 3,583.00$

223,703.76$

The Ownership Thinking Process

The Right Incentives: Designing Incentive Plans

Most incentive plans don’t work

In fact, many of them do damage

The Right Incentives:Designing Incentive Plans

Elements of a Poorly Designed Plan

• Separate Fiefdoms• Discretionary• Unattainable• No Perceived Value• Uncommunicated Goals• No Link to Work• Changes During Community Time

Frame

Elements of a WellDesigned Plan

• Self Funding – Drives Value of Business

• Perceived Value• Shared Targets• Understandable Goals• A Stretch, But Attainable• Clearly Aligns Employees Behaviour

to Business Objectives

Case Studies

LJ Hooker Commercial Central Coast

 Winner of the 2011 ESOP of the year award using a Peak Performance Trust.

Award based on substantial reduction in sick days and improved staff retention, as well as a noted increase in performance and participation.

Ty Blanche – LJ Hooker:

“We have created a more understanding team of people, and

added value to the individual’s performance congruently.” 

“both financial services and property management referrals from

employees participating in this scheme increased at a higher level

than before. I put this down to their seeing value in contributing to the

company’s bottom line because they will share in the profit.”

Best SME/Succession – 2012 ESOP Award

C-Mac Industries

C-Mac was given this award because it is in a period of succession and transition. They have a very different set of circumstances and challenges from large companies. How do you move from single ownership to employee ownership whilst keeping the character, skills, employees and capabilities of the company intact? C-Mac’s plan managed to achieve this.

What Next?

Further information on our website:

www.successionplus.com.au

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Arrange a free 90 minute review

Craig West1300 665 473

cwest@successionplus.com.au

Visit www.successionplus.com.au

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