Indutry
– Builder
Background
Having built a highly profitable business, the owners are looking to step back from day-to-day operations and spend some time on the road seeing Australia.
With three sons early in their careers, they do not want to sell in case the next generation would like to step into the business after gaining experience in the industry.
Their vision is to leave the day-to-day operations to the management team, receive weekly updates and attend a monthly management meeting remotely.
Other factors & considerations
The owners have built a core management team to prepare for their transition away from the business.
They are concerned that, with their absence, overall employee performance will be reduced.
Solution:
– Management Trust & Performance Incentive Program
To secure the long-term commitment of the management team (Operations Manager, Finance Manager & Construction Manager), a Management Trust is set up; the trust holds 20% of the shares in the trading entity. As an initial position, the management team are each issued 20% of the trust (notionally 4% of the business), and the business owner retains the balance to allow for either additional units to the existing team or new management team members). The Units carry immediate income rights. However, capital (ownership rights) are released over the 5-year term; this means that if they leave in the short term, there is no payment to buy back the units; if they leave part way through the five years, then the value is apportioned, if they cease employment after 5 years, they will be paid out the total market value of their holdings.
Before implementation, a business valuation is carried out, and a fixed formula is assigned that governs the value of all future transactions between the business, the management trust and its participants.
A Performance Incentive Program has been implemented. This involves using a balanced scorecard measuring three critical areas for each team (Financial Performance, Job Management & Quoting/Workflow), with targets set based on the team’s labour cost. Each quarter, they receive a % score (100% being the target fully achieved; they can score beyond 100%). If their team meets 100% of target they get their full incentive set at 10% of their salary, if they score below 100% the incentive is apportioned with a performance below 70% resulting in no incentive received, similarly if they outperform they receive additional incentive with no limit.
Outcome
2 years after implementation the business owner moved to a Chairperson role, with their involvement in the business now receiving a weekly update from the management team and attending (sometimes virtually from remote location) a monthly meeting.
Their sons are building experience, one has returned to the family business and whilst not formally part of the management team sits in an and observes the management meetings to gain an understanding of the business at a high level.
The management team have committed to see out their employment terms with the business and look forward to a substantial capital gain on departing the business.
Whilst the business has not grown as sharply as when the owner was driving it they maintain an average growth rate of 12% per year.
The average term of employment has increased from 3.2 to 5.6 years with annual turnover reducing from 23% to 17%.