Associate Ownership: Start with Why

Before you decide on the right associate ownership plan, there’s one important question you must ask.  

By Craig Castelli

Associate ownership plans can be a big part of a DSO’s success. In order to grow, you want to attract great providers, and keep them. It’s no wonder that the businesses we work with are eager to delve into the options before them when choosing the right associate ownership and partnership plan.

But that’s not the right starting point. Before you choose the “What”, I always recommend businesses start with another question: “Why?”

You’ve probably heard that phrase before. Simon Sinek penned a best-selling book “Start with Why,” based on his popular TED Talk on the same subject. According to Sinek, people won’t truly buy into a product, service, movement, or idea until they understand the WHY behind it.

It’s no different for DSOs and the associates they want to attract and retain. We can’t really talk with a group practice about the best structure that’s going to work for them until we know why they’re doing it.

So, why should you offer partnership? The following are some of the more popular reasons:

  • Succession planning/retirement
  • Recruitment/retention
  • Attract acquisition targets
  • Increase valuation/attractiveness
  • Short-term liquidity needs

What about associates? It’s also important to examine the question from their perspective. Why should an associate be interested?

  • Opportunity to build equity value
  • Increase annual income through distributions
  • Sense of ownership and control

Evaluating plans

Once you’ve identified your “Why”, the next step is to evaluate plan designs. There are three common types that we’ll examine.

Share Purchase Plan. This involves the sale of shares to employees, typically over time. The Share Purchase Plan may utilize payroll deductions and/or company financing. Benefits to the owner include employees buying actual shares or units, and increased buy-in when “real money” is used. Meanwhile, with the Share Purchase Plan, employees receive shares sooner, hold shares longer, and have attractive financing.

Profits Interest Plan. This involves the share of the increase in value over time. With a Profits Interest Plan, the owner retains 100% of the present value (no dilution today). This plan also benefits the owner in that it incentivizes/rewards employees for growth. With the Profits Interest Plan, employees receive actual units interest if the company increases in value, and it’s not taxable upon grant.

Phantom Stock. This plan tracks the value of equity (but is not equity) to reward the employee as if they had ownership. Benefits to the owner include preserving control – no new governance requirements, no voting rights or redemption rights for participants, and the plan is revocable. For employees, the plan means increased compensation, participation in a Liquidity Event, and is not taxable upon grant.

So which plan is right for you? Again, there are a myriad of factors that each individual organization will have to work through. But by asking the right questions, in the right order, you can proceed with confidence that you are laying the foundation for strong, sustainable organizational growth.

Craig Castelli, Founder and CEO of Caber Hill Advisors. He launched Caber Hill in 2014 in order to solve a problem plaguing millions of business owners: a lack of qualified, experienced advisory firms willing to serve small and middle market companies. Caber Hill’s innovative approach combines the best elements of the local business brokerage community and the large, very expensive investment banks.