Employee share plan drives contractor to 25% annual compound growth

By David Palmer
He said the last year “had been a bit tough” and margins had halved. “But we’re very fortunate. We’ve got last year’s turnover in the bag [at the end of October] although there is not so much profit involved. That gives us comfort because we can bid for work but we’re not desperate to win it.”
Giumelli says Ertech will do anything above ground or below it from a dollar upwards. So much so that he was named Ernst and Young Western region Entrepreneur of the Year in 2007. “Most of our business is outside Perth with a large base in mining,” he said. Earthmover mentioned the huge Gorgon project* in the north of the state and Giumelli said “we are up there doing it.”
Well motivated
Clearly good people have been and are vital to the success of the company. As its website says: “Employees own 100% of the company and have a key stake in its continued success.” Not for nothing is the head office at 108 Motivation Drive, Wangara.
Giumelli says: “If you motivate people the right way they’ll give you the best results. To measure that we have developed a thing called return on effort. In other words how many cents in the dollar profit can we make for every labour dollar we put in?”
To start with he says to hire attitude, not experience. “Hire kids straight from school or people who are sitting in number two spots elsewhere.”
Giumelli said that from about the age of 50, business owners should “start thinking about handing some shares over to their troops,” as part of their retirement strategy. But to value them he believes they must pay for them.
Shares no perk
“Shares in the company should be considered an investment rather than a perk. So we require our purchasing shareholders – they must be employees – to put down 25% of the total they are prepared to commit as an investment. Then they can pay the outstanding amount from the dividends as they come in. That generally takes about 5 years,” he said. Then they can ratchet up their share holding from the dividend stream, commensurate with their levels of responsibility.
But Giumelli said to retain the right people and a suitable vehicle for retirement for the principal, it was vital a business kept growing. Unless your business is growing, it is on a path to destruction, destruction of wealth. If your business is not growing, there is no opportunity for your young staff to grow into more responsible roles and eventually they realise there is no immediate future for them in the business and they take off.
“And that is the last thing you want as the retiring founder. You want your business to remain with good people at the helm, a business that is vibrant and growing, especially while you are in retirement,” Giumelli said.

Radical alternative
Giumelli said that rather than sell a business on retirement, a radical alternative was: “to do what you have been doing all your life and grow the business further.
“Say for example we can grow the business at 15% a year. In 5 years instead of $1m a year we are earning $2m. So just assume you keep all that for yourself. That’s an average of $1.5m a year for 5 years or a total of $7.5m. That is $5.25m after tax so let’s call it $5m.
“However, now you have a business that is earning $2m profit a year. Four times estimated before income tax (EBIT) on this represents $8m. This means you could sell the business in five year’s time, get your $5.25m dividends plus $8m for the business, which totals $13m versus the $4m you would have got by selling 5 years earlier,” Giumelli said.
“Why would you sell 5 years early for $4m, when by keeping it for 5 years, you are almost $10m better off?” he asked.
Giumelli said he required people who held Ertech shares to be employees of the company, with one exception.
“The founder has the ability or flexibility of taking those shares into retirement. But it wouldn’t necessarily be retirement. He could be a director of the company well into his septuagenarian or octogenarian years. He could give his input and perhaps be a perennial bore at every AGM. That’s his privilege; he was the one that started the business after all,” he said.
Giumelli said business owners in their 50s needed to start asking questions about their exit strategies.
What am I going to do in retirement? What am I going to do with all that money if I sell the business? What am I going to invest in where I will get a better rate of return than the business I’ve spent my life in and what am I going to do with all that spare time?
“After all, there is a limit to the amount of dog walking, fishing and golf one can get involved in,” Giumelli said.

* The tender Ertech has won so far in the Gorgon project, involve site development and the WAPET landing contract. This contract involves:
•    Preparing a site for a construction camp;
•    Construction of 300,000m2 of sealed roads;
•    Setting up a desalination plant to provide water for construction purposes; and
•    Providing a seawater intake tower to feed the desalination plant and future plants.
Additional works include:
•    Reticulation of sewerage and water mains;
•    Electric mains;
•    Navigation beacons;
•    Improvements to the landing craft offloading area;
•    A diesel fuel storage area; and
•    A communications tower.