Succession planning: Using Enterprise Management Incentives to develop your
Senior Team
As business owners look at who takes over the business from them when they retire or just pull back to focus on new projects, the one thing they need to know is that they have senior people in place who are locked into the business. Whether owners are looking to sell or keep the business, it’s essential to have people in place to carry on running it.Staff retention and incentivisation has become a top priority for employers with more mobile working, rising wage costs and inflation driving the need to hold onto talented staff. This can be a more acute problem at senior levels where employers have immediate gaps for experienced and highly qualified employees but the pool to draw from seems to have shrunk after the pandemic.This is not just anecdotal. Our recent SME Barometer report identified that two thirds of SMEs find recruiting new talent with the right skills challenging and employee wellbeing has risen to be the second most important priority for business. As a result, businesses are rightly looking at benefits and incentives to boost employee attraction, engagement and loyalty.
Why use Enterprise Management Incentives?One arrangement which is routinely raised in this context is Enterprise Management Incentives (EMI) share options which is a way of motivating and retaining key staff by offering shares in their employing company. Provided the company meets the qualifying conditions, EMI can be one of the most tax efficient and flexible means available to provide shares. However, it can be a blunt instrument and we often find that too little thought is given to matching EMI awards to key business objectives.Whilst we should not underestimate the positive psychological impact of an employee becoming a shareholder, the purpose of offering them shares is to generate extra shareholder value. Shareholder value may be the reliable payment of dividends or maximising value on a share sale, but it can be less tangible such as preserving the company’s cultural values or providing secure long-term employment for staff.Whatever the overarching objectives, we need to be clear why we are offering shares and also that existing shareholders get sufficient value back for seeing their percentage interest in the business go down.EMI and succession planningIn the context of succession planning, an owner might be looking to sell the business and having a strong and committed senior management team is a critical factor in business valuation. EMI can align interests as employees will also benefit from a successful sale rather than seeing it as something unsettling or a risk to their position. In this situation, EMI is all about maximising business value on sale.Ritchie Tout, Tax Partner, explores EMI schemes in relation to succession planning further here. The insight also details how EMI work, the benefits and who qualifies.
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This is the second insight in our series on succession planning. Over the course of the next couple of months we will be detailing some other private business exit strategies, including management buyouts (MBOs), employee ownership trusts (EOTs) and sales to a third party.If you have any questions in relation to EMI schemes or would like to discuss their viability for your business, please get in touch with your usual Azets advisor or a member of our specialist team.