EMPLOYEE SHARE PLANS
Maximizing business value
The greatest asset of most trading businesses is goodwill. The value of a company’s assets valued as a going concern is usually much greater than their scrap value on a liquidation.
Employee share ownership ownership plans (also described as “employee share schemes” or “ESOPs”) do several beneficial things.
- Employees become motivated as part – or even, full – owners of the business
- Exiting owners can sell out to employees as motivated buyers
- An employee share trust can provide an internal market for the company shares
Because a company can naturally claim a tax deduction for money paid to an employee share trust for the employees’ benefit, an employee share plan can help finance employee ownership of the company without unwarranted tax burdens. Employees are able to acquire shares in their employer company in a similar way to leveraged buyouts used by bigger businesses for acquiring listed companies.
Capital gains tax concessions
Where a business owner sells shares in his company to his employees he may be eligible for small business concessions which could effectively exempt as much as 75 to 100 per cent of any capital gain from tax. (These concessions are quite reasonable when it is realized that what is being sold is a right to future income which will be taxed in any case, so taxation of goodwill capital gains would amount to double taxation.)
These concessions are also naturally available to new employee owners of a company, whether they hold shares directly or through an employee share trust which holds the shares for them.
Financing future company expansion
An employee share plan, by assisting employees buy shares in the company, can also underwrite the company’s expansion by helping it raise more shareholder capital. Its internal resources can be harnessed with external funds to support organic growth.
Family or management buyouts
An employee share plan can be used in conjunction with family succession or management buyouts. Family employees, directors, managers are all eligible to join an employee share plan. A retiring owner who is a director can also join the employee share plan if, for example, he wants to help guide the company and the employee share plan through an initial establishment phase before he starts selling down towards retirement.
An advantage of having an employee share plan with ownership held through an employee share trust is that contentious family or business issues can be discussed and settled in the trust, away from the company boardroom, so that the company can continue to be run smoothly.
Conclusion – employee share plans
Employee share plans are a powerful tool for motivating employees. Employee share plans can open up opportunities to maximize and realize the value of goodwill for company owners, present and future. They can also provide an alternative to a discounted sale on a founder’s retirement to a competitor or a public company acquirer. Employee share plans can also facilitate inter-generational succession and renewal for family companies.
For further information, please see www.equityplan.com.au