These very difficult times have caused many entrepreneurs to give thought to what form their business needs to be as the world of commerce resumes and who will be key in working with them to take the business forward again. I believe it is going to be more about retaining quality rather than quantity as businesses rationalise their operations.
Keeping your best people has always been desirable and in good times less challenging than currently, when the immediate focus may be more on survival and having sufficient cash to keep the business going.
With very little ‘in the cupboard’, apart from the making of promises for ‘when times are good again’, is there anything that can be done now which is affordable and which incentivises your best people to stay long term by providing them with something more tangible?
For companies the ownership is represented by those who hold the shares and to whom the profits can be distributed. Ultimately the goal for those shareholders may be to achieve an exit which, for some, the current experience may have shortened the desired time frame.
What is often asked of me is “Shall I give them some of my shares?”
Whilst transferring shares doesn’t impact on immediate cashflow and enables the key person to participate in the profits and, perhaps more significantly, in an exit, it is not something I would advise and for two main reasons.
Firstly, if it doesn’t work out then getting the shares back can be messy and expensive and secondly the transfer of the shares can present the key person with a significant tax liability with only bits of paper – the shares – out of which to meet it, for which you are unlikely to be thanked!
What I would advise is to consider the use of share options, which represent a legally binding agreement between the company and the key person and so is something tangible which do not become messy if it does not work out as the agreement is effectively ‘torn up’ on leaving. They also enjoy a whole host of tax benefits and, if they meet the qualifying conditions, are Government approved, as they look to encourage employee participation in business.
Share options give the key person the right to a number of shares if certain conditions are met – that might be after achieving a certain target profit or achieving exit.
The ‘achieving exit’ is one that works particularly well as it enables the key person to also participate in the exit and can bring significant tax reliefs to the company. I worked closely with one business in introducing share options, with a view to exit, which added £1.5m to the share consideration as we made the buyer pay for the privilege of enjoying the tax benefits that arose from the scheme.
The main advantage to the employee is that there is no tax bill until the option is exercised which, if at the time of exit, will be when they have the money to meet it and they can also benefit from the business asset disposal tax rate of only 10%.
One of the key aspects when putting the scheme in place is undertaking a valuation of the shares. Whilst this is a specialised exercise, which we are very experienced in carrying out and one that we would obtain HMRC agreement to, with business performance currently suppressed it is advantageous to have a lower than usual valuation behind the arrangements and so to act now.
There is much to consider and it is crucial that advice is taken from people who are familiar with these arrangements in order to ensure that all the requirements are met, the safeguards are in place and the paperwork is right.
I wish you well in the recovery and hope your team are with you – retained and incentivised.