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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter I.11 · Handing It On

For the person with a P&L, a signature limit, a board and a retirement date that is closer than it was. This workbook uses the language of the firm without apology, because the firm's own numbers already decide most of what follows — they have simply never been arranged as an ownership question.

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THE PREMISE, STATED COMMERCIALLY

You are being asked to do one thing: decide what your enterprise's ownership structure will be when you are not in the room, and decide it as a financing question rather than as a legacy question.

Those are not the same conversation and confusing them is expensive. The legacy conversation asks who deserves it, what your name will be attached to, and how the thing you built will be remembered. The financing conversation asks a single arithmetic question: at what rate can this enterprise grow using only the capital its own ownership structure permits it to raise, and is that rate greater than the rate it must hold to keep its position?

        ROE  ×  retention ratio      ≥      required growth rate

Every succession structure in this chapter — foundation, purpose trust, employee ownership trust, ESOP, cooperative — forecloses new equity permanently. That is the point of them. But it means the inequality above becomes binding in a way it has never been for you before, and the discipline of this workbook is to compute it first and choose the instrument second.

Most succession advice reverses that order. It arrives with a preferred structure and works backward. Do it in the right order and half the options eliminate themselves in an afternoon.

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PART ONE — THE CAPITAL TEST

Days 1–15

Exercise 1.1 — Compute the ceiling (two hours with your CFO)

  g*  =  ROE × b        ROE on beginning-of-period equity
                        b = 1 − (dividends + distributions) / profit after tax

Run it for the last five years and for the plan. Two disciplines:

1. Use beginning-of-period equity. If your board pack reports ROE on closing equity — most do — use g* = ROE·b / (1 − ROE·b) instead, and say which you used on the page. The two differ by more than a point at high returns and somebody will check.
2. Normalise for one-offs. A disposal gain inflates ROE and therefore the ceiling. Strip it. You are computing a structural capacity, not a year.

Exercise 1.2 — Compute the requirement (half a day)

What growth rate must this business hold to keep its position? Three routes; run all three and take the highest.

• Market growth. Your served market's growth rate. Below it you are losing share by definition.
• Capital intensity. Maintenance capex plus the capex that scale requires, as a percentage of the invested base. A business whose asset base must grow fifteen percent a year to serve the volume it already has is a business requiring fifteen percent.
• Competitive necessity. The R&D or capability spend the two strongest competitors are committing, expressed as a growth rate on your own base.

Exercise 1.3 — Put the two on one page

Positive headroom: the structure can finance the business it has. Lock it.

Negative headroom: do not choose a different trust. The trust is not the problem. Go to Exercise 3.3 and design the subsidiary route, which is what Carl Zeiss did in 2000 and 2004 and what John Lewis had no vehicle to do.

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PART TWO — THE INSTRUMENT

Days 16–45

Exercise 2.1 — Separate the two rights explicitly (board session, 90 minutes)

On a whiteboard, two columns: economic rights and control rights. Put every current holder into both. Then ask the Bosch question: if these two columns were held by different parties with different interests, which party would we want in each?

The filed answer, for reference:

This is a ninety-minute exercise that has never once, in our experience, produced a board that wants the columns identical afterwards.

Exercise 2.2 — Draft the three reserved matters (one afternoon, with counsel)

Write the list of matters that require the purpose holder's consent. Three. Disposal of the enterprise or a controlling interest; alteration of the stated purpose; alteration of this list.

Then run the two drafting tests.

• The unsympathetic counsel test. Hand the purpose recital to your own M&A lawyer and ask them to write a memo showing how a buyer could satisfy it while dismantling the business. If they can, it is too broad, and "to act in the long-term interests of the company" is the standard failure.
• The ordinary reader test. Could a new employee, reading the purpose, tell you whether a given decision breached it? If not, redraft.

Exercise 2.3 — Choose the jurisdiction before the structure (one hour)

Uniform Trust Code § 409 caps a non-charitable purpose trust at twenty-one years. Delaware, 12 Del. C. § 3556, removes the cap. Wyoming, New Hampshire and South Dakota have comparable provisions. A perfectly drafted deed in a UTC state is a twenty-one year lease on your own company, and it will expire approximately when your successor's successor takes over.

Exercise 2.4 — Model the seller's present value honestly (half a day)

If any part of the consideration is deferred — and in an EOT, a leveraged ESOP, a management buyout or vendor finance it always is — build this table before you agree a price.

  PV = (price / n) × Σ 1/(1+i)^t    for t = 1…n

At a 20 percent discount to a trade sale, six years of instalments and an 8 percent discount rate, a £10m business nets the seller £6.16m against £7.60m from a trade sale taxed at 24 percent. The break-even discount is 11.5 percent over three years and 1.4 percent over six.

The negotiating conclusion is the useful part: term matters roughly eight times more than tax relief. Halving the payout period from six years to three takes the tolerable discount from 1.4 percent to 11.5 percent. If the transaction is difficult, shorten the term before you touch the price.

Exercise 2.5 — Choose the vehicle against the jurisdiction you are in (two hours)

A decision table, to be completed with your tax adviser and then attached to the board paper. The right answer is frequently a combination.

The repurchase obligation deserves a line of its own, because it is the ESOP-specific version of the ceiling problem and it arrives late. A mature ESOP must buy back the shares of departing participants, and at scale that liability competes directly with growth capex. Model it out twenty years at your own demographic profile, not at a benchmark. Firms that did not do this are the ones that terminated their plans in year fifteen.

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PART THREE — THE CAPITAL ROUTE

Days 46–75

Exercise 3.1 — The covenant stress test (with treasury, one day)

A leveraged employee-ownership transaction puts the purchase price onto the company's balance sheet as deferred consideration at amortised cost, with the interest unwind running through finance costs. Model the full deferral term against every covenant you have, at a downside case, before signing. The common failure is a structure that clears the covenant in year one and breaches it in year four when the consideration steps up and the market softens together.

Exercise 3.2 — The tax arithmetic that funds the debt (US firms)

An ESOP trust is a tax-exempt shareholder. Where the plan owns 100 percent of an S corporation, the entire passthrough income is untaxed: on $10m of pretax income at an effective passthrough rate around 29.6 percent, $2.96m a year stays in the business — available to service the debt that bought the company. IRC § 1042 separately allows a C-corporation seller of 30 percent or more to defer gain into qualified replacement property. Model both; they interact.

Exercise 3.3 — Design the subsidiary route (the Zeiss manoeuvre)

This is the exercise for anyone whose headroom came out negative, and it is the most valuable page in this workbook.

You do not loosen the lock. You move the fundraising.

1. Identify the business unit with the highest capital requirement and the cleanest separable economics.
2. Put it in its own legal entity with its own accounts, its own management and its own board.
3. Raise against that — minority equity, a joint venture partner, a listing, project finance, an infrastructure fund — with the parent retaining control.
4. The parent's lock is untouched. The purpose is untouched. The capital arrives.

Carl Zeiss floated Carl Zeiss Meditec on the Frankfurt exchange in 2000 and reformed its foundation statute in 2004 so that Carl Zeiss and Schott could become joint-stock companies wholly owned by the foundation, expressly to reach capital markets. Control of the parent never moved.

The counterfactual is on the record too. John Lewis Partnership: roughly £1bn of stated investment requirement against £56m of profit before tax in the year to January 2024, after a £234m loss the year before — 17.9 years of profit to fund a five-year plan, no equity to issue, and no financeable subsidiary to float. The partnership bonus, paid every year from 1953, was not paid in 2022, 2023 or 2024.

Design the lock and the capital route as one decision. Taken separately, the lock always goes first, because it is the emotionally satisfying one, and the capital question arrives four years later as a crisis with no good options.

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PART FOUR — THE MEMORY, AS A DELIVERABLE

Days 76–90 and onward

Exercise 4.1 — Make it a condition precedent (one clause)

The operating memory — twenty standing decisions with change-conditions, ten relationships, five numbers, one page of purpose — is a deliverable of the transaction, certified complete by the incoming chair, with release of the first tranche of consideration conditional on it.

Put it in the term sheet. An unpaid promise to write it later is not written later, and this is the only component of the whole structure that counsel cannot draft for you.

Exercise 4.2 — The twenty decisions, at executive scale (120 hours, spread)

Across an eighteen-year tenure, roughly nine to ten thousand non-routine judgements are made and about 85 percent are undocumented — some eight and a half thousand decisions living in one head. You will not transfer those. You will transfer twenty, and the discipline is the third column: what would have to change for this answer to change. That clause is what makes a rule into a judgement your successor can exercise rather than a precedent they must obey.

A hundred and twenty hours across eighteen years is 6.7 hours a year. It is the cheapest line item in the entire succession and the only one that cannot be bought.

Exercise 4.3 — The non-intervention protocol (write it before you need it)

Agree in writing, with the incoming chief executive, what you will and will not do in the first year: which meetings you attend, which you do not, whether you sit on the trust board — and the recommendation is that you do not, because a mandate that comes with a shadow is not a mandate.

Then keep the record the student workbook keeps: every decision made differently from how you would have made it, and what happened. It is the only honest measure of whether the handover worked, and it is a better board paper than any retrospective.

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WHAT THE FIRM'S OWN NUMBERS ALREADY SAY

Before this reaches a board, four figures already sitting in your systems will carry most of the argument, and none of them requires a study.

One — the ROE you already report. It is in the pack. Multiply it by your retention ratio and you have the ceiling. Nobody has ever done this in your firm and it is a two-cell calculation.

Two — the discount rate your own treasury uses. You apply it to every other deferred cash flow. Apply it to the consideration in your own succession and the EOT-versus-trade-sale question resolves itself without a values debate.

Three — the turnover cost you already know. Employee-owned firms report materially lower voluntary turnover; you can price that against your own fully loaded replacement cost rather than against a study. A single percentage point of turnover reduction, at your own numbers, is frequently larger than the entire annual cost of the tax-free bonus.

Four — the key-person concentration your insurers already priced. You hold key-person cover because an underwriter agreed that certain departures would materially damage the enterprise. That premium is a market valuation of the operating memory you have not yet written, and it is the cleanest way to put 120 hours of documentation into a board paper as a risk-reduction item rather than a legacy project.

The argument that works in the room is not the ethical one. It is that the firm is currently carrying an unhedged, uninsured, undocumented dependency on a small number of people, and that three of the four figures above are already audited.

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THE BOARD PAPER — one page, for the next meeting

Recommendation. That the Board approve the appointment of counsel to structure a stapled succession deed, comprising a perpetual purpose trust holding a single non-economic control share with three reserved matters; an employee ownership vehicle holding the economic majority; and a certified operating memory as a condition precedent to first-tranche release.

The number that decides it. ROE × retention ratio against required growth. For this enterprise: [ ]% × [ ]% = [ ]% against a required [ ]% — headroom [ ] points.

The financing. Deferred consideration at amortised cost over [ ] years; covenant headroom modelled to the downside case at Appendix B; where headroom is negative, the subsidiary route at Appendix C.

The risk we are accepting, stated plainly. New equity is foreclosed permanently. If required growth rises above the ceiling and the subsidiary route is unavailable, the structure will constrain the enterprise. Mitigation: the inequality is recomputed annually and reported to this Board alongside the accounts. It takes four minutes and no standard governance calendar contains it.

The risk we are removing. That the next owner is not bound by anything we have decided, and that eleven years of work can be reversed in an afternoon by someone entirely within their rights.

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SELF-ASSESSMENT

Under 24, the missing piece is almost always the first row, and everything else in this workbook is downstream of it. Spend the two hours with your CFO.