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FROM THE FOUNDER
M any owners of firms in this business come to the conclusion at some point that they would like to bring in certain people in their employ to ownership. Firm owners should consider adding key employees to ownership for motivation, transition planning, and financial strength – before it’s too late. Helping employees become owners
There are a wide variety of reasons to do so. Becoming an owner in the firm you work for certainly is a goal or career milestone the most motivated people tend to have. It is part and parcel of the culture of the industry. So if you own a business you are going to be aware of this expectation and of course don’t want to lose anyone over it. Other reasons include a desire for founders to plan for transition. They realize they must start selling down over time and get others involved in management and leadership so the firm can go on. In some cases, selling ownership to employees is also a way to ensure the firm is adequately capitalized. New equity beefs up the balance sheet and helps the firm be stronger financially. It can increase borrowing capacity and/or reduce the need for debt financing. And of course, there is the whole issue of motivation. Hopefully when people have an ownership stake they will be more motivated to do whatever it takes to make the firm succeed. So clearly, there are lots of
reasons to add additional owners over time. But then the big question is, “How?” How should one do it? Do you give the ownership to these key people? If you sell it, how much do you sell it for? How do you expect your people to afford it – most of whom are probably living paycheck-to-paycheck and don’t have a lot of discretionary funds to invest? These are big questions and not easily answered without considerable thought and study. Giving shares or ownership interest to people may make sense from the standpoint of affordability for the employee, but is that really the best way to make them think like an owner needs to think? Many would say “no.” You also have to consider the tax consequences of that gift. The employee is getting something and the government wants to get their share of that gift by taxing the value of it at ordinary income rates. How will the employee afford to pay those taxes?
Mark Zweig
See MARK ZWEIG, page 6
THE ZWEIG LETTER JULY 8, 2024, ISSUE 1544
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