Another issue of our “ESOP’s fables” takes us to a family-owned business where a manager acquired shares and became part of it.
It all starts with the client’s decision
A client contacted us. The client is an important Czech family-owned company with a unique story, already managed by the next generation. Let us take a look at the story of their management incentive plan. For many years they have been working with a key manager who has helped the entire group grow massively in almost 10 years of work.
The client had tried to address and roll out the management incentive plan with two other advisers before he engaged us. Such cases should always make you cautious. The previous advisers may have lacked the experience and skills to find the best solution for the client.
Or the client may have had extremely ambitious and sometimes unrealistic ideas about the implementation of such a plan, as is often the case. I won’t keep you in suspense any longer. The fact that you are reading these lines means that we have successfully implemented a solution with the client.
The client and his requirements
What was the issue? Since the very beginning, the client has been doing business in a very traditional and conservative industry. In the Czech Republic, there are not many family-owned companies that are so connected with the founder’s name and his family.
It was probably for these reasons that the client (a second generation of the family business) was cautious and tried to understand all aspects of the management incentive plan to avoid making a mistake by offering a certain percentage to the manager that he would regret in the future.
On the other hand, the long-serving key manager thought the discussion was lengthy because the business owner did not trust him. I must also say that the previous advisors did not present and explain all options that would have resolved both parties’ requirements. Eventually, we succeeded.
The key to the success was a discussion between the client and the manager to find a real intersection of both parties’ expectations. In the discussion, we tried to present and integrate various options and sub-options to find consensus together. We also presented an economic model and a timetable for individual steps to the manager to ensure that both parties had maximum confidence that the whole process was progressing well.
Dividing the whole incentive plan (often lasting several months) into shorter stages that are completed one after another has a strong positive effect on the confidence of both parties, the whole process and the relationship with the legal adviser.
The manager’s fundamental wish was to have a stake in the group in the form of real shares. The client, on the other hand, wanted to retain the ability to always influence the family business without interference from another party.
By a solution the whole story continues
Each story is unique. In this one, we proposed issuing real shares, excluding the manager’s right to vote at general meetings and including a flexible right to share in the profits. After several rounds of negotiations and explanations, both parties agreed to this option.
In addition to the essential setup, the contractual documentation had to provide for many details and potential situations. This would be worth a series of its own but let me only briefly sum up that we handled, among other things, setting economic targets for the manager, non-competes, annuities, procedures in the event of the manager’s serious illness or death, and inheritance of his shares.
Everything was successfully closed and signed, and the whole story ended with a “closing” dinner.
The business remained family-owned, even though some of its members have a different surname.
And by the way, they are doing incredibly well!
