Introduction

Many businesses, particularly those most vulnerable in such areas as travel, sport, entertainment, hotels, restaurants, leisure, fashion and retail have a skilled and trained workforce which they now face having to lay off.

There will be a core within that group who are invaluable for the business – who are managing the crisis with energy, empathy and skill, and who will be essential for the coming months. Whilst the business is doing everything to stay solvent financially, who will be the people who will run things operationally now? Who will be the people who will rebuild? What can you do to pivot a negative situation into a win-win?

The key to long-term success won’t just be about seeing out the crisis, but how well and how quickly you can recover afterwards

Financially, whilst one option is to apply for a loan under the UK government’s Coronavirus Business Interruption Loan Scheme (“CBILS”), the company would remain 100% liable for the debt. Many of them have debt right now and will be unwilling to consider what will feel like a perpetual mountain to overcome.

Furloughing staff might work for junior or entry-level staff, but for your critical team, this isn’t a viable option;

1.     You need them to keep working right now when you most need them, and furloughing means tools down.

2.     Their salary levels will likely be far above the £2.500 pcm maximum available, and likely have dependents and mortgages that limit their flexibility

3.     You need them engaged for the long term

You need to retain both cash and talent. How can you achieve it?

One option which involves the issue of equity is to issue them with growth shares. These are shares typically issued to senior management which reward them for growing the Company. Typically they are issued a special class of share (say a “B” share) with special rights which allows them to receive a share of any growth in value of a Company when the company is sold.

Let’s look at this example:

·         Today, Company X is valued at £10 million.

·         Company X agree a scheme with certain employees where B shares come into play above £15m. They could share 10% of the value above this threshold.

Wind forward 18 months, the company has rebounded to a value of £20m and is being sold:

·         Pay-day for the employees, who would share 10% of the £5m upside.

The advantage for managers of setting up such a scheme now is that values are likely to be depressed giving them a lower hurdle to achieve and potentially a higher benefit on exit.

This is particularly advantageous in the US, because issuing employees stock options (essentially the same scheme) results in no immediate tax charge. Only when the benefit comes through will the tax be payable.

The UK situation is slightly different because of the different tax treatment, but this can be overcome by valuing the growth shares and setting the payback hurdle at a higher level than the current value to reduce the value of the growth shares and any current tax charge (often to nil). These arrangements are already popular with growing companies and should prove even more popular in the current climate where current values are lower and cash is tight.

With current values so depressed, it does represent an attractive opportunity right now in the UK. It could create an engaged, energised core workforce, committed to and invested in the long-term recovery of the business, and it will reduce your salary costs from right now.

Get in touch

Talk to Robert (robertsharp@valuationconsulting.com) about setting up growth share schemes and associated valuations – and see how you can use today’s difficult and challenging situation to your- and your core employees advantage.