Leading Companies Online Magazine Archives
On the Comfortable Marriage Of Employee Ownership and Entrepreneurship
By Anthony I. Mathews, Beyster Institute Staff
The Beyster Institute is unique in many respects, but perhaps the most significant is that we carry the dual (and equal) mandate both to promote employee ownership and to foster entrepreneurship. This dual mandate creates an equal responsibility to successfully deliver on both of those objectives, and we pursue both with equal intensity.
I am often asked, though, how the notions of employee ownership and entrepreneurship ever got together into the same sentence. After all, the questioners imply, isn’t entrepreneurship all about dynamic, charismatic individuals marshaling resources they don’t have to create vast wealth for themselves? How could employee ownership conceivably fit into that? Isn’t the idea of shared capitalism contrary to entrepreneurship?
Obviously, we don’t think so. Our founder, Dr. J. Robert Beyster, very successfully combined the two concepts in founding and building SAIC, and we know of hundreds of other companies that have followed suit. In fact, we have found that employee ownership and entrepreneurship fit together very nicely indeed. In our view, employee ownership takes a very important step to creating a viable economic future for many people who are not blessed with inherited wealth or the good fortune to create it on their own. But, even beyond the fact that sharing capital with employees can go a long way to helping them to achieve a secure future, sharing ownership also makes good sense financially and operationally for the entrepreneur as well.
Entrepreneurs know that while “cash is king,” they have several other “currencies” available to them to assist in the building of their businesses. Good will or affiliation, for example, can go a long way toward helping a business grow,and, germane for our discussion here, equity can also be used as a very effective tool in developing an entrepreneurial business.
Let’s look at four critical points in the life cycle of an entrepreneurial business: getting the business started; moving the business beyond critical mass; revitalizing the business when growth becomes static; and dealing with business succession or winding the business down. At each of these critical points employee ownership can and often does play a significant role in moving the venture forward.
GETTING STARTED
In the first critical point, getting started, entrepreneurs are generally strapped for cash and looking for effective ways to get their business off the ground with what they have. At this stage, sharing equity is a way to attract the best employee for the job and one that can save the company valuable cash for capital investing. Creating a team of stakeholders can greatly contribute to the stability of the company’s original foundation, and entrepreneurs who understand this premise start their journey to business success with a real leg up. There is no better base upon which to create a successful, entrepreneurial enterprise than a community of highly incentivized individuals with a real stake in the outcome.
MOVING BEYOND CRITICAL MASS
In every industry, there are break points through which entrepreneurs must push their business in order to move it to the next level. Too often, entrepreneurs assume that getting through these break points to reach critical mass requires outside investment, and often, as a result of that thinking, they give up very large parts of their equity in order to infuse additional capital.
Often, though, what they really need is a creative plan and a truly engaged employee group who are willing to accept the challenges before them. Additional money is not always the answer. A group of stakeholders working together in an efficient and focused way can be more than equivalent to the assist to be had from outside investment.
In purely cost terms, usually a much smaller part of the founders’ equity will be required to create a community of stakeholders among employees than will be required for outside investment. And this “dilution” of the founder’s interest can have a much less significant effect on the “private equity” or “venture capital” into the tent.
REVITALIZING A STAGNANT BUSINESS
In the life of every business, there are also points at which the business stagnates, stalls or even begins to decline. Often, at these static points, the business really needs creativity, broader thinking and renewed commitment to get it moving again. All of these factors can very effectively be addressed by creating an equity-based incentive program that directly links the value of incentives to the achievement of the objectives.
Studies have consistently shown that where employees are included in the planning and vision of a business with a participative operating style and where those same employees have a real stake in the outcome, they are very likely to display exactly the attitudes and behaviors that can result in reenergizing the business and getting it rolling again.
BUSINESS SUCCESSION
No matter how much love and passion one has for a business and no matter how much the business has grown and prospered under the entrepreneur’s guidance, there comes a time to let it go. At this point, entrepreneurs are often faced with a dilemma. Unless they have been very careful to build diversified resources, most of their wealth is locked in an illiquid investment – their entrepreneurial business. Their options are limited.
The entrepreneur might be able to transfer it to family or management; sell the business to someone else; take it public (if it has grown large enough and the timing is right); liquidate it; look for a merger partner or just let it keep rolling along until the inevitable transition occurs and then let someone else worry about it.
One attractive alternative may be to sell the company to its employees and give them an opportunity to use the same access to the future earnings of the company to pay for it that any outside investor would be looking to use.
Current law provides numerous incentives for entrepreneurs to consider this alternative. ESOPs can give the entrepreneur the ability to cash out some or all of his or her equity, tax-deferred, at an independently determined fair market value. Because ESOPs are interested in building future value for the employees, they are able to pay full value and accept a reasonable rate of return, unlike other investors with a shorter-term mentality. Tax and other benefits allowed to operating ESOP companies can also greatly magnify the company’s ability to fund purchases of the entrepreneur’s stock. This approach to business succession may potentially be the best return overall that the business owner can achieve from any buyer.
On top of that, entrepreneurs consistently have such a significant personal investment in their companies that the prospect of having it dismantled or incorporated into a larger entity may not be acceptable. On the other hand, the thought of leaving behind an employee-owned company which is building the wealth and future security of the very people who helped create the success of the enterprise in the first place has great appeal.
Entrepreneurial businesses often need help to grow, advance and succeed. Don’t forget that the asset closest to home may be just the ticket to provide that help at the most important points in the company’s life.
©2008 The Beyster Institute and its authors and their entities. All rights reserved.
|
Back |
|
|
Print this page |
|