Creating Value for Your Business When Your Best Assets are People
For owners of closely held, service-based businesses contemplating the total or fractional sales of their companies, attracting and retaining key employees is critical to creating and sustaining value for the long term. A service-based business faces the unique challenge of proving its continuing viability to a potential buyer since its assets are people. A business that can keep its best employees during and following a transaction will be much more likely to keep its customers, thus retaining its value.
The competition for talent these days is fierce. This is especially true with professional service industries, including general contractors. It’s the employees’ collective expertise; skills, relationships and knowledge that help create value for your business. Your workforce is essentially your product. There is a direct correlation between the strength of a general contractor’s workforce and the company’s overall value.
So how do you attract employees and keep them with your company to ensure the viability and build the value of your general contracting business? Establish a plan to actively build and demonstrate the value of your company through key employee attraction and retention strategies.
First, you have to attract and hire the right people. Then you must give them incentive to stay. The promises of competitive compensation and retirement plans are simply not enough to retain the most talented employees over the long run. Equity incentives can enable you to provide your most valued employees with equity positions similar to what they might receive if they worked for a publicly traded company. A variety of alternative forms of real or synthetic equity can be used, including stock options and restricted stock (i.e., forms of real equity) or phantom stock and stock appreciation rights (i.e., forms of synthetic equity).
Are you concerned with giving up part of the ownership of your business? Does the idea of having multiple shareholders make you uneasy? If so, synthetic equity may be the right answer for you. In short, synthetic equity can be structured to convey most of the economics of “real” ownership, without giving up the legal rights of ownership. As a result, selected members of your leadership team can participate in the value growth of the business without muddying up the ownership waters. In other words, you can still own 100% of the company yet still allow key employees to benefit financially from the growth in value over time. Sound interesting?
Synthetic equity plans can be designed to provide intermediate term cash payouts that allow certain key employees to realize the benefits along the ride as opposed to at retirement only. A plan that only allows for payouts at retirement may not serve the employee well and a plan that only allows for short term payouts may not serve the company well. Finding balance is the key and one size definitely does not fit all. It is important to thoroughly understand the dynamics of each business and then customizing a plan that serves its needs. Creating flexibility is critical to achieving overall objectives.
Developing incentive plans that are based on shifting employee behavior and providing incentives that are meaningful from the employee’s perspective will create a line of sight for the employee. Employees need to understand the linkage of what they do, how it drives company value, and the impact it has on their incentive. Business owners should remember to be creative and stay consistent with strategies and rewards that are currently in place. In a nutshell, the ultimate goal would be to align the employees’ interests directly with the owner(s) of the company in a way that allows everyone to benefit from an increase in company value over time. We recommend seeking expert counsel to ensure your reward system best fits your long term goals.
In addition to incentives, operational changes are also key to building and sustaining value for your company. As a business owner, gradually phase yourself out of your company’s day-to-day operations in order to position it as a successful, independently functioning enterprise. Give your best employees more responsibility and hold them accountable for their business decisions. You will find that making management accountable will help create a sense of ownership for the company’s success and therefore, an increased sense of loyalty from these key stakeholders. The right combination of corporate responsibility and benefits can be the key to attracting and retaining highly valuable employees.
There are also often overlooked factors that greatly contribute to employee attraction and retention, including company reputation, the nature of the work, individual job titles, working conditions, location and the company’s culture. In my experience, any one of these factors won’t keep an employee from leaving the company. However, the apparent lack of any one of them will keep an employee from staying. Remember that in the eyes of an employee, perception is reality. Therefore, it is imperative to have clear lines of communication that provide employees, managers, leaders, and owners with the information necessary to make important decisions.
Business owners are inundated with the day to day activity of running a company which can make it difficult to objectively evaluate all of the necessary factors to ensure employee attraction and retention. That is why it is important to work with an experienced and trusted advisor to develop a realistic and personalized plan to attract and retain key employees. If your general contracting business is rich with these intangible assets, take the proper steps now to strengthen your company, ensure its long term viability and ultimately increase its marketplace value.
Rocky Fiore is a managing director at Prairie Capital Advisors Inc. Fiore has extensive experience in leveraged ESOP and M&A transactions, as well as other forms of leveraged buyouts. For more information, contact Fiore at 630-413-5575 or firstname.lastname@example.org.
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Posted on Thu, May 19, 2016