How mini markets maintain a participative culture in an ESOP

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Whether it be for a down payment or university tuition of a dependant we all run into larger than life expenses from time to time. When it comes to an ESOP, a mini market can often help deal with these issues. In an established ESOP the Plan Administrator (typically the Board) has the discretion to create in the future an internal market for share trading where ESOP shares may be bought and sold. This is referred to as the Mini market.

If implemented, it would be open to employees who own ESOP shares. Trades would be administered by the Company in order to facilitate the buying and selling of shares. The share trading price will be the annual share value, the FMV as calculated by the most recent valuation. The details of the structure would be provided at the time of implementation.

In a survey EBI conducted, 80% of the respondents utilize mini markets in their ESOP.

Of those, 90% offer the mini market annually. Most found their mini markets to be moderately successful in terms of what their employees wanted. Many saw their employees wanting to buy and sell multiple times a year and others found there were too few shares to produce liquidity in the mini market. These responses were collected in 2018. Like many aspects of the ESOP the mini market requires participation to be successful. Utilizing the mini market allows employees to buy and sell as they need, within the specified timeframe of course. Mini markets don’t have to be an annual event either; it can be at the discretion of the board or the participatory engagement of the employees. Your mini market can be when you decide based on demand and your comfort level. The mini market is designed to allow some liquidity for employees as well as an opportunity to increase their investment in the Company (subject to any caps).

The mini market furthers a participative culture by involving the employees in the process of buying and selling and the excitement that creates. It also raises to employees the importance of investing in their futures, which is ultimately in line with the growth of the company (appreciation in share value). It creates an atmosphere of ownership that can only come from owning shares. Further the sale of the shares to other employees (not the company) by way of the mini market may make the shares eligible for the Long Term Capital Gains Exemption (LCGE) making the sale gains tax free to the employees.

By Colleen Johe, Employee Ownership Specialist & Perry Phillips, President 

Canadian ESOP design and implementation in the works

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What an interesting spring it has been, we’ve seen Employee Ownership Trusts (EOTs) development proposals in the budget, in the news, and have been very busy in our offices. In June’s newsletter, we thought we’d share with you a current clients’ Canadian ESOP design and implementation.

ESOP Client in the works: We currently have a client in the construction industry with about 100 employees in stage two of our two-stage participatory design and implementation process. This client came to us last year and filled out our feasibility survey online. Upon completing the feasibility review and initial meetings with the client we were able to begin the stage one process to assess if an ESOP would be feasible at this point in time. The goals of this ESOP are very straightforward and were articulated by the Owner in our stage 1 review:

  1. Engage employees across the organization to be more consciously aware of the “Big Picture” at the Company.

  2. Enhance the commitment and motivation of the team.

  3. Create a long-term, flexible exit and succession plan for the current Owners.

  4. Retain the people who drive the success of the company.

  5. Attract qualified and entrepreneurial talent.

During stage one, we performed a total of 10 owner/employee interviews and 51 employee questionnaires. These interviews and questionnaires allowed us to gain insight into both the employees’ and owners’ understanding of ESOPs and what participation would look like for this potential ESOP. Our client provided us with all requested documentation regarding the company’s structure and current financial situation and our analysis began. Utilizing the information, we then prepared a Feasibility and Recommendations Report that outlined the unique plan design for this company. We met with the client to review any questions they had regarding the report and our general conclusion. Finding that an ESOP was feasible and after reviewing the recommendations with the client, we were then headed into Stage two of our design and implementation model based on our recommendations – a broad-based equity plan.

Stage two began with an owner survey to gather data on how the owner was leaning on certain decisions such as launch date, financial disclosure, eligibility, purchase methods, etc. These responses were used to prepare the preliminary ESOP design documents, the ESOP Blueprint. Next was the formation of the client’s ESOP team. We like to start these team sessions with an Ownership Thinking exercise to get everyone in the mentality of what it means to be an owner within the ESOP. The purpose of the ESOP Team is to create the conditions for a participatory design approach. Our meeting progressed with a full review of the ESOP Blueprint which is the document from which the Employee Shareholder Agreement will be based on.

Some of the design elements in the ESOP Blueprint that the ESOP Team provides input on before it is finalized are:

  • Eligibility (broad-based or key-person plan, what is the waiting period)

  • Allocation (how shares are allocated to eligible employees)

  • Purchase methods (payroll deduction, shares as part of a bonus, loans, etc.)

  • Minimarket (participants can sell or buy during a brief internal market)

  • Buy-out (what happens to shares when someone leaves)

  • Tax implications (using a trust to buy shares of departing employees so that employees of a CCPC can access the capital gains exemption)

  • Risks (liquidity, market, tax, etc.)

Currently, there is a general ESOP info session being scheduled, a valuation is being conducted, tax reviews are underway, legal documents are being drafted, and communicated materials are being created. The final launch is scheduled for October 2022 where employees will receive an information package containing an intro letter from the President, the ESOP Blueprint, all legal documents, tax summary, share allocation letter, and FAQs. They will then have about a month to review the information and make their decision to participate. Finally, we would run the CORE4ESOP survey, which is a performance analysis tool to help support the success of the ESOP.

In 2023, we will provide a client update to hear how their ESOP launch went.

Learn more about Canadian ESOP design by completing the feasibility survey, joining our newsletter, attending one of our events, and following us on social media (ESOP Builders on LinkedIn, Twitter, Facebook, and YouTube).

By Joanna Phillips, CHRL, CVB, Vice President & Colleen Johe, Employee Ownership Specialist