One of the key challenges for the services sector, and those investing in the sector, is the attraction and retention of the key assets: talented people. Finding the right incentive structure is a major consideration for ambitious management teams to ensure the best people grow their business, and therefore ultimately creating value for shareholders. Management Equity is a proven incentive structure that works for both shareholders and employees.
In simple terms Management Equity means that managers who are responsible for running a business have a direct ownership in their business, making them highly incentivised to grow their profits into the long-term, so aligning their interests with the other shareholders. It attracts entrepreneurial people with ambition, who recognise that to grow significantly it would be beneficial to use the infrastructure of a larger group and share the gains.
Empresaria (EMR:AIM) is an international specialist staffing group that uses a Management Equity business model to attract and incentivise entrepreneurial managers who want to develop and grow their business. The original chairman of Empresaria, David Telling, successfully set up and developed the support service group MITIE (MTO), which stands for ‘Management Incentive Through Investment Equity’ and has participated in over 100 successful start-ups over its 25 year history.
The current chairman, Tony Martin, also used a management equity model to build firstly Select Appointments and then Vedior, until it was acquired by Randstad (RAND:AMS) in December 2007 in what was the largest deal in the staffing sector. This model is now being used by Empresaria to develop its multi-branded business, where the quality and retention of staff is a key factor in creating value for shareholders. It is a model that works, especially in the service sector and particularly recruitment.
In Empresaria’s model the subsidiary managers, who have the in-depth knowledge and expertise in their markets, have operational responsibility for their businesses and commercial autonomy, but they also have the security and financial backing of being part of a larger group. Often for businesses operating in the staffing sector, working capital demands can stunt the growth of ambitious companies. Being part of a group helps them overcome that short-term barrier for long-term shareholder gains. They also have access to ongoing support and advice.
Empresaria will always hold at least 51% of the shares to give it control and the ability to consolidate the results. A valuation methodology is agreed up front for the manager’s equity, which will eventually be acquired in full, typically after a five year minimum period although there is no obligation on Empresaria to purchase the shares. This is very different to an option where one party can force the other to sell or buy. Although day to day responsibility for running the business remains with the senior managers, there are clear guidelines on decisions to be agreed by all shareholders and all companies operate within a framework of central financial controls and strict reporting requirements.
What does this mean for shareholders?
In a people business this model helps to secure the key asset (talented and ambitious people) while the business and ultimately the shareholders directly benefit from the value they create. The entrepreneurs get the chance to access growth and wealth that would be much more difficult to achieve on their own and shareholders have access to a proven model that creates value. A win-win for all.
Spencer Wreford, finance director, Empresaria