A properly structured business can theoretically last forever, or certainly well beyond the founding owner’s career. The concept of being a good steward of ownership is that founding owners can use their businesses to accomplish good and to take care of all its stakeholders – clients, owners, employees, and the surrounding community. A well-managed business and purposeful leadership are agents of positive change.
Starting at a very basic level, being an equity steward is about setting up a business’s documentation to support a culture of continuity–specifically addressing when and how founding owners must offer to sell their equity at specific, predetermined intervals. This functionality supports next generation investment and long-term involvement in the business. As an overarching philosophy, stewardship emphasizes that owning equity comes with responsibilities beyond, or at least in addition to, profit and value maximization. Blending the short-term goals of a business with the long-term goals of the stakeholders is how one becomes a good steward of ownership.
Many successful family businesses have been built on a foundation of long-term stewardship, with owners prioritizing the generational health and sustainability of the business over short-term gains. There is absolutely no reason, however, that family-like businesses and professional service businesses with unrelated owners or leaders cannot do the same. Equity stewardship in a private business is an important philosophy that supports a powerful set of tools to reshape today’s business landscape, and includes:
- Attracting and Retaining Talent: In a competitive job market, employees are increasingly seeking ownership and a stake in the businesses they work for. Equity stewardship allows private businesses to attract and retain top talent by offering them a share of the company’s success.
- Alignment of Interests: Equity stewardship aligns the interests of employees with those of the business owners. When employees have a financial stake in the company, they are more likely to be invested in its long-term growth and profitability.
- Motivation and Productivity: Equity can be a powerful motivator for key employees. Knowing that their efforts directly contribute to the value of their stake in the company can boost morale, engagement, and productivity.
- Succession Planning: Equity stewardship can be an effective tool used through a formal Succession Plan in a privately held, Professional Services Business. By gradually transferring ownership to key employees, business owners can ensure a smooth transition and continuity of leadership.
- Tax Advantages: Depending on the specific plan design, equity stewardship can offer tax advantages for both the business and the employees.
- Increased Business Value: Companies with strong equity stewardship programs tend to have higher employee retention, productivity, and overall business value. This can make the business more attractive to potential investors (G2s and G3s) or acquirers.
…and that is the short list.
Going back to basics and supporting the purpose of this book, being a good steward of ownership starts with documenting your Business’s unique and specific set of rules to address when and how owners might step out of the Equity circle and voluntarily relinquish their ownership interest. Every owner, for instance, wants to be able to sell their Equity Interest, someday, at current Fair Market Value (FMV), for cash, at long-term capital gains rates. Accordingly, being a good steward of ownership requires prospective sellers who want to sell their Equity under these circumstances to adhere to certain, written, pre-established guidelines if they want their full expectations to be met.
Functionally, the Business owners can agree as a group that in order to meet a seller’s reasonable expectations when selling Equity, there will be established and reasonable expectations in return from the remaining owners. A common requirement is that a seller must give at least 24 months of notice to obtain their full benefits. In the event an owner leaves and wants to sell their equity on two-week’s notice, then the FMV of their Equity Interest may be discounted and payment terms may be applied through Seller Financing rather than a lump sum through bank financing. These Stewardship Rules are put in place to ensure the Business remains liquid and sustainable, and that the Business has time to address the loss of talent.
Stewardship Rules might even include a requirement that G1(s) cannot hold more than, for example, 50% of the Equity Interests in the Business at age 60, and no more than 25% of the Equity Interests by age 65, and must sell, or offer to sell, all of their Equity by age 70—adjust the numbers and ages for your situation. The idea is that putting stock into play at set, predetermined intervals helps to ensure that the next generation plans for, and can make, the necessary Equity investments during their careers. These rules also help to make certain that the Business does not have to deal with a single, large, majority shareholder of a valuable Business suddenly in the future for an event not covered by a typical Buy-Sell Agreement (i.e., death and disability).
These Stewardship Rules, along with all the buy-sell provisions, should be reviewed every couple of years by all the owners, especially as the Business grows in value and the owners of significant amounts of Equity get older. It also is easier to document all this from the outset, while everyone is getting along well and are focused on the future and all the opportunities it may bring. In time, Stewardship Rules become a part of a Business’s culture of sustainability.
Thanks for reading,
David Sr.
