Facing the Music: How to Communicate Value and Financials to Employee Owners

Transcription

1 Facing the Music: How to Communicate Value and Financials to Employee Owners Presented to the CAWS Chapter of the ESOP Association October 4, :15 pm to 4:15 pm Presented by Chris Kramer Strategic Equity Group Mike Davidson Gardeners Guild, Inc. Jeffrey Schmehr HDL Companies

2 Goals of the Session To discuss why you should communicate financials, metrics, etc. To explain what drives value and how employee behavior impacts it To share what you might want to communicate to employees To give examples of how you might communicate with them To share specific examples of tools you can use 2

3 Why Communicate Financial Information? ESOP alone doesn t drive value ESOP needs to translate into employee ownership culture Research shows: ESOP + engagement = higher performance Growth in share value, employee morale, profitability, resiliency, etc. Communication spurs engagement, and engagement drives performance Employees want to learn, make an impact, become something, need to lead them down this path 3

4 What Drives Value? Company performance is the biggest driver of value. Company performance is driven by employee performance. Everything employees do affects value. Growth, profitability, cash flow, predictability, sustainability Employee behavior directly impacts cash flow, risk, or both. 4

5 What Drives Value Intangible Assets Think in terms of creating, improving, or maintaining intangible value. Intangible assets: Customer relationships (contractual or otherwise), workforce, reputation, trade name, know-how, process, safety programs, installed base, and many others (goodwill). Think switching costs, risk mitigation, profit enhancement, competitive advantage, USP. Thinking in these terms will help you increase growth, profitability, predictability, and thereby value. 5

6 Valuation Spectrum Low High 6

7 Gardeners Guild, Inc. (GGI) Who We Are Landscape Contractor serving the greater San Francisco Bay Area since 1972 Full service maintenance & construction - commercial & residential Employees: full-time Revenues:11 million ESOP: 100% Employee Owned S-Corp 2017: 45 Years in Business & 20 years ESOP 7

8 GGI ESOP Key Dates Description 1998 ESOP Formed 40%, partially leveraged purchase Included provision to purchase 100% of stock in future 2002 Debt from the initial stock purchase paid off 2003 Partially leveraged purchase of remaining 60% of stock to become 100% employee owned Company elected S-Corp status 2008 Debt on ESOP Loan paid in full - May Celebrated the Company s 45th Anniversary and 20 Years as an ESOP Current Focus is on protecting, enhancing stock value through growth and proactive management of repurchase obligation 8

9 Financial Literacy Who, What, When Who What How & When ESOP Board of Trustees (Internal 5) Leadership Team (3) Financial Statements Annual Valuation Report Key Performance Indicators Cash Flow Financial Statements Key Performance Indicators Quarterly Trust Meetings One meeting with Appraiser Weekly Cash Flow Monthly Financials Management Team (16) Cash Flow Financial Statements Key Performance Indicators Monthly electronic updates Quarterly Operations Meeting Full Financial Statements & KPI s Field & Admin Staff (135) Summarized Profit & Loss Key Performance Indicators Specifics to Operations Division Meetings Monthly Division Meetings Annually with Leadership Team Business Dictates As Needed 9

10 Where Does a Dollar Go? (Example) A Single Dollar Revenues - $1.00 (-) Direct Costs $.56 GGI SAMPLE $10,000,000 (-) $5,600,000 Gross Profit $.44 (=) $4,400,000 (-) Variable Overhead $.24 (-) $2,400,000 (-) Fixed Overhead $.14 (-) $1,400,000 (-) Other Inc/Exp $.01 (-) $100,000 (=) Net Profit $.05 (=) $500,000 10

11 GGI Finances vs. Your Paycheck Revenues Sales to Clients GGI (-) Direct Costs Labor, Materials, etc. Gross Profit Portion of remaining Revenues (-) Overhead Expenses Non-billable labor, vehicle expenses, small tools, advertising, building, rents, etc. (=) Net Profit How do WE spend/invest??? Gross Pay Wages from hours worked (-) Income taxes, health benefits, EDD insurance & 401k Net Pay Take home pay Individual (-) Living Expenses Food, rent/mortgage, utilities, auto, etc. (=) Disposable Income How do YOU spend/invest??? 11

12 Hinderliter, de Llamas & Associates (HdL) Founded in 1983 by Robert Hinderliter Headquartered in Brea, CA. Offices in San Dimas, CA; Pleasanton, CA; Austin, TX; and Houston, TX. S-Corp 80 employees Government consultant for California and Texas cities and counties. Specializes in sales tax reporting, finding sales tax misallocations, and budgeting assistance. 12

13 Our Vision By 2020, grow HdL into a $20M professional services firm providing revenue enhancement, auditing, economic development, regulatory compliance, and software solutions to local government agencies. 13

14 Key Strategies Diversification products, services, geographies Incredible client experiences unmatched service! Provide actionable insights reports, analysis, expert team Thought leadership issue updates, articles, case studies High productivity efficiency, processes, technology No missed opportunities find ALL the money! Accurate forecasting people + method Largest database keep it growing! 14

15 Revenue Diversification 2017 CY RESULTS 2007 Contract Services - Sales Tax 17.1% Economic Development 3.0% Cannabis 10.7% 2017 STA 4.0% Audit - Transactions Tax 0.9% Contract Services - Sales Tax 10.7% Audit - Sales Tax 82.9% Audit - Sales Tax 70.7% 15

16 Revenue & Operating Expenses Breakdown Transaction Tax Audits 1.2% Audit Services 81.4% Contract Services 17.2% Other Income 0.2% All Other Operating Expenses 16% Total Personnel Costs Revenue Expenses 16

17 Comparison 8.27% 3.06% * *State Controller s Office 17

18 : STA Revenue 18

19 : STA Expenses 19

20 : STA Net Income 20

21 2018 BUDGET: Revenue, Expenses, Profit (actual through May) 2018 Budget Actuals Revenue $ 1,697,979 $ 1,677,401 Expenses $ 654,867 $ 579,853 Net Income $ 1,043,113 $ 1,097,547 21

22 5 Year Projected Revenue PROJECTED REVENUE $30,000,000 $25,000,000 $20,000,000 $19,250,550 $20,752,780 $21,992,014 $23,306,462 $24,526,626 $15,000,000 $10,000,000 $5,000,000 $ Budget 2019 est 2020 est 2021 est 2022 est 22

23 Promoting ESOP Value Price is what you pay. Value is what you get. Warren Buffett The main ingredient of stardom is the rest of the team. John Wooden The single biggest problem in communication is the illusion that it has taken place. George Bernard Shaw 23

24 EXAMPLE 24 24

25 EXAMPLE 25 25

26 ESOP Share Price $35.00 $30.00 ESOP SHARE PRICE: $29.53 $25.00 $20.00 $17.45 $21.01 $15.00 $13.40 $10.00 $7.89 $5.00 $

27 27

28 We Are Fortunate That Our company has a great reputation We get to work with a terrific team of professionals Our customers are very satisfied We have financial strength Our business continues to grow New services are gaining momentum 28

29 COMMUNICATING THE ESOP GGI Challenges 75% Hispanic Workforce Remote Locations/Employees What and how much to communicate How to make complex ESOP concepts simple Company-Wide vs. Small-Group communication Engaging New Employee Owners Leveraging the ESOP to drive performance Consistency in communications during economic downturn Who s responsible to communicate 29

30 COMMUNICATING THE ESOP Successful Programs Frequently Asked Questions (FAQ s) SPD rewritten in layman s terms i.e., When do I get my money? Gardeners Guild University (GGU) Small groups business focused all related to ownership behaviors that drive stock value Annual Ownership Meetings & Stock Statement Distribution You have their attention because you are talking about their money take advantage of it. 30

31 ESOP COMMUNICATIONS Successful Programs (cont.) Safety Jamboree ESOP Station Fun & games Bingo, Tic-Tac-Toe, etc. All tied to ESOP terminology from the FAQ s Publications Monthly Newsletter 5 Years Running Ownership focused Owners Manual Why ESOP? Open Book - Finances Where does a dollar go? GGI Finances vs. Employee Paycheck 31

32 ESOP COMMUNICATIONS Strategies Tenets of our communication strategies: Keep it simple! A picture is worth a thousand words Translation a must Train/communicate in small groups Communicate when employees are most receptive Tie it all back to the success of the ESOP Have fun with it where you can Multiple voices wherever possible outside perspective Keep trying new things a must 32

33 COMMUNICATING THE ESOP HdL Challenges Highly educated workforce Remote Locations/Employees What and how much to communicate How to make complex ESOP concepts simple Company-Wide vs. Corporate HQ communication Ex-government employee workers used to PERS Leveraging the ESOP to drive performance Who s responsible to communicate 33

34 COMMUNICATING THE ESOP What HdL Does It starts with recruiting Onboarding ESOP 101 Specific ESOP topic presentations Reliance on the ESOP Communication Committee ESOP Newsletters Fun ESOP events Constant efforts to improve 34

35 ESOP COMMUNICATIONS HdL Strategies Additional tenets: It s better from the employees When in doubt, overcommunicate Repetition is a must Identify specific employee successes Different things appeal to different employees Keep financial communication simple and serious The employee experience is part of the value 35

36 What Can You Do As An Employee? Look for ways to improve profit (lower costs, improve revenues) Look for ways improve metrics/data/insight/efficiency Adopt a sales mentality Make it painful for customers to go elsewhere Look for opportunities to increase sustainability/predictability and lower risk Company performance = sum of performance of all employees 36

37 How You Make an Impact Example 1 Increase gross profit by 1.0% $19.4 million x 1.0% = $200,000 $200,000 x 6 = $1,200,000 Per Share Impact = $37.00 Percentage Increase = 34.5% 37

38 How You Make an Impact Example 2 Reduce Rework by 1 per Week 12 $50.00/hour x 52 = $31,200 $31,200 x 6 = $187,200 Per Share Impact = $5.76 Percentage Increase = 5.4% 38

39 How You Make an Impact Example 3 Increase Sales by 10.0% $19.4 million x 10.0% = $2.0 million $2.0 million x gross profit % of 21.0% = $420,000 Selling, general, admin costs (18.0%) = $360,000 Profit of 3.0% = $60,000 x 6 = $360,000 Per share impact = $11.00 Percentage Increase = 10.3% 39

40 Sample Statement 40

41 Closing Comments ESOP is a unique opportunity. Ownership without investment. Act short-term/think long-term. ESOP is a retirement plan. Develop an ownership culture ESOP alone is not enough. Hold each other accountable but provide support and guidance to your teammates. You play a significant role in creating value. Every Day!! QUESTIONS??? 41

42 Contact and Bio Chris Kramer Chris Kramer Strategic Equity Group 6 Hutton Centre Drive, Suite 860 Santa Ana, CA (714) ckramer@segco.com Chris is a managing director of Strategic Equity Group, a boutique investment banking and valuation advisory firm headquartered in Orange County. Chris helps business owners bring about ownership transitions by representing them in sales to private equity funds, strategic buyers, Employee Stock OwnershipPlans,orotherparties. SEGhas been involved in transactions with over 100 ESOP s over the years, and has represented sellersindozensoftransactionsduringhis career. Among other professional credentials, Chris holds an MBA from the University of Southern California, is a Chartered Financial Analyst, and serves on the valuation advisory committee of the ESOP Association. He is a frequent speaker to various groups of business owners and advisors on a wide variety of ESOP, merger and acquisition, and value enhancement topics. 42

43 Mike Davidson Gardeners Guild, Inc. VP/CFO Mike Davidson VP/CFO Gardeners Guild, Inc Goodrick Ave. Richmond, CA

44 Jeffrey Schmehr HdL Companies CFO/CAO Jeffrey Schmehr CFO/CAO HdL Companies 120 S. State College Blvd Brea, CA