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How to Use the Employee Takeover Toolkit

The Employee Takeover Toolkit is designed to guide departments through an employee takeover transition process and complements the Employee Takeover Policy and Guidelines. Departments may want to use the toolkit as a starting point, tailoring the information to the specific programs or services being considered for an employee takeover. Departments should, however, consult the Employee Takeover Policy throughout the transition process to make sure they are meeting all the necessary requirements.

The following table describes the purpose of each tool and the contents of each chapter. The employee takeover process is not necessarily a linear sequence; some iteration should be expected.

Chapter

Overview

What's Inside

Chapter 1: Employee Takeover Process Model

Guides departments through the sequence of events and decisions in an employee takeover transition process.

- flow chart outlining three main stages in the employee takeover process

- timeline

- list of high level tasks indicating where other tools in the kit apply

Chapter 2: Employee Takeover Suitability Assessment

Provides departmental designates with a tool to assess departmental readiness for employee takeovers and whether specific programs and/or services are suitable for employee takeovers.

- outline of expression of interest in an employee takeover

- employee takeover suitability assessment quiz

- employee takeover proposal review checklist

Chapter 3: Employee Takeover Business Case Template

Assists departments and their designates in developing a business case for proposed employee takeovers.

- outline of steps in building the business case

- questions that should be addressed as part of the business case analysis

- sample table of contents for summarizing the results of the business case

Chapter 4: Employee Takeover Business Plan Assessment

Provides background information and guidance to departmental designates in reviewing business plans from proponents for an employee takeover of programs and/or services.

- outline of key elements of a business plan

- business plan checklist

- sample financial statements

Chapter 5: Employee Takeover Contract Review

A checklist for reviewing employee takeover contract documents.

- checklist of essential contract elements for selected clauses

- suggested contract language for selected clauses

Chapter 6: Employee Takeover Resource List

A list of examples of reference materials and resources that could provide more information to departmental designates and potential employee takeover proponents.

- reference materials

- suggested sources of additional information, such as community organizations, business advisors and government departments


Employee Takeover Process Model

The following tool provides an overview of the events and decisions in an employee takeover transition process. This model is meant to be a quick reference chart for departments to plan and manage the process. It provides:

  • a flow chart outlining the three main stages in the employee takeover process, key activities within each stage, and the level of involvement of departments and employees throughout the process;
  • a timeline indicating the anticipated time required to complete each stage; and
  • a list of high level tasks involved in each key activity, including tasks and sub-tasks. Flags indicate where additional tools have been developed to help departments with the process.

While the model is intended to guide departments through the employee takeover process, departments should consult the Employee Takeover Policy and Guidelines to make sure they are meeting all the necessary requirements.

Employee Takeover (ETO) Process

footnote for the graphic


Employee Takeover Suitability Assessment

Introduction

Departmental Strategic Planning - Employee Takeover Suitability AssessmentThis chapter provides departmental designates with a tool to assess departmental readiness for employee takeovers and whether specific programs and/or services are suitable for employee takeovers. The tool can be used in two ways:

1. As part of the evolution of departmental strategies for delivering programs, including alternative methods. This type of assessment would produce a list of potential or types of candidates for employee takeovers that the department would want to examine more deeply.

2. In considering how to respond to an expression of interest from an employee or group of employees about an employee takeover. The outcome would be a decision to examine this option more closely, invite the employee takeover proponents to develop their proposal further, and establish focal point processes for review and decision-making within the department.

In either case, the outcome is not an approval of a particular proposal but rather a decision to examine the employee takeover option(s) more closely, to encourage the employee(s) to develop their proposal further, and, if appropriate, to call for competitive bids. A sample of a basic form for employees to use in expressing their interest in an employee takeover is at the end of this chapter.

This tool builds on the employee takeover guidelines, section 2, which outlines the roles of the primary participants and the sequence of decisions facing departmental managers, and provides a more detailed assessment test for employee takeover suitability.

Role of the Departmental Focal Point

Departments should designate a senior executive to act as the departmental focal point for employee takeover decisions. This ensures that employee takeover planning in the department is consistent and relevant to the departmental strategy and that the process is fair. Employees should be encouraged to speak to the designate or focal point as soon as they have an idea for a takeover proposal. Thus, the focal point or departmental designate should be objective and independent. If a decision on a prospective takeover could affect the individual personally, another individual or individuals (i.e., the advisory panel) should be designated to consider that decision. In most situations, existing contracting mechanisms would be used for an employee takeover. Departmental contracting specialists can advise the departmental designate. Similarly, departmental legal counsel and human resource specialists can provide advice as needed.

Independent Advisory Panel

Employee takeover planning can require a complex financial analysis. The department may also want assurances that the analysis is conducted objectively. The deputy head may create an independent advisory panel to help evaluate employee takeover proposals, and, as appropriate, oversee the contracting process. The advisory panel - drawn from the public and private sectors - recommends a decision to the deputy head.

Role of the Employee Association

Departments can help employee associations develop the takeover proposal and business plan. Employees considering an employee takeover bid should form an employee association. To receive financial support from the department, the employee association must be incorporated.

Employee Takeover Planning

The department's decision that an employee takeover corporation could potentially deliver a program or service exists within a larger context of departmental strategies, program review and options on alternative methods of delivering programs. Ideally, a program review and alternative service delivery should be considered before an employee takeover. However, if an employee or group of employees expresses an unsolicited interest in taking over an activity, the department should quickly review the overall fit of this commercialization with the departmental strategy, including other initiatives such as forming a special agency. The employee takeover filters apply equally to unsolicited and "solicited" employee takeover situations.

The final filter in departmental planning is employee takeover suitability. If a program or service is not amenable to commercialization in general, it is highly unlikely that it is a good candidate for an employee takeover. The employee takeover suitability is measured on a continuum (see figure on next page). If the program or service fits more on the right side of the continuum, there is a greater likelihood that an employee takeover will be appropriate.

graphic Expertise common to many ....

Fig.

Employee Takeover Suitability Assessment Quiz

This part of the Suitability Assessment tool is a quiz with four parts. The first is a preliminary assessment of the department's overall readiness for employee takeovers, and would be used once. The second looks at the fit with the departmental strategy and is used where there is an unsolicited expression of interest. The third part guides departments in considering whether specific units are suited for employee takeovers. It can be used proactively or in response to the expression of interest from an employee group. The final section helps clarify what the department should do to respond to the expression of interest or allow the idea to move forward.

Not all questions apply to all situations. The quiz will guide you to skip some questions and will also suggest where to obtain more information.

Check ( ) the appropriate box.

1. Preliminary

1. Is the departmental employee takeover process clear?

r Yes - communicate to employees

r No - review the employee takeover guidelines and define the basic departmental process

2. Does the departmental process establish a clear focal point for an employee takeover assessment and decisions?

r Yes - communicate to employees

r No - review the employee takeover guidelines and define a focal point. Also consider establishing an independent advisory panel to help analyse more complex takeover situations

2. Fit with Strategy

3. Is the employee takeover opportunity interdepartmental in scope?

r Yes - contact the other department(s) and involve in the assessment

r No

4. Is the departmental strategy with respect to the program/service clear?

r Yes - communicate to employees

r No - go to question 4.2

4.1 Is the employee takeover opportunity consistent with the departmental strategy for the program or service?

r Yes - go to question 5

r No - go to question 4.2

4.2 To what extent can approaches other than direct delivery protect ongoing public interest in the program?

r There is no ongoing public interest - phase out the program

r Only direct delivery can protect the public interest - look for internal efficiencies. Consider whether segments of the program can be delivered in other ways

r Alternatives such as regulation or the terms and conditions of a contract or other agreement (whether the toolkit or other providers) can protect the public interest - go to question 4.3

4.3 On a scale of 1-5, where 5 is "highly operational in nature," to what extent do the decisions made within the program area focus on operations versus policy?

boxes and numbers

4.4 On a scale of 1-5, where 5 is non-core, to what extent is the activity or service "core" to the mandate?

boxes and numbers

4.5 On a scale of 1-5, where 5 is high, to what extent does the current mode of service delivery combine internal direct delivery and purchased or partnered services?

boxes and numbers

Tip: if the department already buys a large portion of the service, there may be less scope for further change.

4.6 Has a make or buy analysis been completed?

No - it is generally advisable to complete such an analysis as input to the business case

Yes - on a scale of 1-5, where 5 is "more cost effective to buy," to what extent would it be more cost effective to buy rather than make the service?

boxes and numbers

4.7 On a scale of 1-5, where 5 refers to high opportunities for improved use, to what extent could the program or service improve the use of resources by serving a wider market (beyond the public sector) or by diversifying products/services?

boxes and numbers

4.8 On a scale of 1-5, where 5 is high, how likely is it that users (internal or external) would pay/pay more for the service?

boxes and numbers

4.9 On a scale of 1-5, where 5 is high, to what extent can performance be measured?

boxes and numbers

Scores on individual questions should not be taken as the determining factor. If the average score on 4.2 through 4.9 is 3 or more, the department should closely consider alternative service delivery options. A variety of alternative service delivery options is available. If the score is less than 3, it is unlikely that either alternative service delivery or an employee takeover would be appropriate. Employee takeovers are a special case of alternative service delivery options.

3. Employee Takeover Suitability

The following questions look more closely at the suitability of the target work activity for employee takeover. There may not be enough information to respond fully to these questions at this stage. Where this is the case, users should flag the question for later review.

5. Is the scope of the employee takeover consistent with that of a small business? Tip: there are various definitions of "small business." For non-manufacturing sectors, Industry Canada defines a small business as one employing 50 or fewer people. For employee takeover purposes, the figure could be higher.

r Yes

r No - Note: Where the employee takeover implies a larger business, the scope may exceed departmental authorities for a takeover approval. This does not mean that the department should not proceed; it likely means that a Treasury Board submission is needed.

6. On a scale of 1-5, where 5 is high, to what extent does the delivery of the service require expertise? Tip: it is highly unusual that the expertise is unique. Be specific. Think about how quickly an existing business could develop this expertise. Where expertise is unique, consider the risk of creating a private sector monopoly in the future.

boxes and numbers

7. On a scale of 1-5, where 5 is high, to what extent are there positive regional economic development consequences from an employee takeover in this area? Tip: think about the impact on existing suppliers if the government "sponsors" new entry to the market. Can a domestic or international market be developed that does not exist?

boxes and numbers

8. On a scale of 1-5, where 5 is high, how important is it that service be continued during a transition to the private sector?

boxes and numbers

9. On a scale of 1-5, where 5 is high, to what extent could continuing employment through an employee takeover reduce the pressure for other workforce adjustment? Note: this information may not be available at this point; it is considered in greater depth in the business case.

boxes and numbers

10. On a scale of 1-5, where 5 is high, to what extent might a more entrepreneurial approach to service delivery produce significant gains? Tip: can efficiency gains be made through better use of existing resources?

boxes and numbers

11. On a scale of 1-5, where 5 is high, to what extent are existing employees interested in working in the employee takeover? Note: this information may not be available at this point; it is considered in greater depth in the business case.

boxes and numbers

12. On a scale of 1-5, where 5 is high, what is the general level of business acumen among the proponents? Note: this information may not be available at this point; it is considered in greater depth in the business case.

boxes and numbers

13. On a scale of 1-5, where 5 is high, what is the current level of private sector capability in this service area? Tip: where the private sector is currently very strong, the justification for a non-competitive process should be higher. Where private sector capacity is weak, there is greater justification for the employee takeover. This is considered in the business case.

boxes and numbers

14. On a scale of 1-5, where 5 is high, to what extent would the employee takeover be competitive in serving other markets? Tip: at this stage, the availability of alternative markets may be satisfactory; this aspect is considered more closely in the business plan.

boxes and numbers


Scoring on the basic employee takeover assessment

An average score of 3 or more on questions 5 through 14 suggests basic acceptability of an employee takeover option. If the score on any one item is very low, the designate should provide feedback to the proponents. They may be able to adjust and modify the basis of the takeover.

4. Next Steps

If the employee takeover concept is basically acceptable, the department should advise the proponents to proceed with their business planning and proposal development. The following questions are designed to help the departmental designate organize for that phase of the process.

15. Are there other potentially qualified suppliers, including other employee groups, potentially interested in taking over the same activity? Tip: look at your response to question 6.

r No

r Yes - Tip: consult with departmental contracting specialists and agree on the overall process. It is important that all employee groups be considered equally.

16. Would some or all the employee takeover proponents likely be in a conflict of interest if they were to continue in their current duties while developing the employee takeover proposal?

r No - Tip: proponents may still be granted leave to develop
their proposals.

r Yes - Tip: consider requiring the proponents to take leave without
pay or assign the proponents duties that would eliminate the
potential for conflict.

17. Would the designate be in a conflict of interest if he or she participated in developing the business case and assessing the employee takeover proposal?

r No

r Yes - Tip: consider assigning the employee takeover proposal analysis to an independent advisory panel.

18. Do the proponents need access to other departmental information to develop their proposals?

r No

r Yes - Tip: if such information is accessible under access to information, you should provide direct access. In a competitive situation, all proponents should have equal access to departmental information. Departmental designates may want the employee association to disseminate relevant information to all employee bidders.

19. What level of support can the department give the employee takeover proponent in the developmental stages? Note: maximum support is $100,000, but the level of support should be proportional to the scope of the employee takeover. Where there are two or more "competing" employee takeover groups, departmental support should be spread among these groups.

20. Will the employee takeover likely require access to intellectual property?

r No

r Yes - consult with the Treasury Board Secretariat. Tip: consider whether the Crown would want to withhold access to that intellectual property.

21. Will the employee takeover likely require the use of other government property or assets?

r No

r Yes - consult with department facilities and materiel management specialists or Public Works and Government Services Canada. Tip: consider whether the Crown would want to restrict the use or sale of that property.

22. Are the relevant local unions aware that an employee takeover proposal will be considered?

r No - advise the unions

r Yes - agree on a process for ongoing dissemination of information

23. Are all affected employees aware of the proposal?

r No - advise affected employees

r Yes

The department designate should respond to the expression of interest within 30 days of receiving it. The response should provide clear rationale accepting or rejecting the expression of interest and, in the case of accepting, should outline:

  • an overview of the process to be followed and suggested timelines;
  • how the employee association can obtain required departmental information; and
  • "firewall" arrangements to prevent a conflict of interest in the employee takeover development and approval process.

It should also deal with issues relevant to the post-employment guidelines for senior executives.

Outline of Expression of Interest in an Employee Takeover

Name of the Proponent Employee Association

Mailing Address

Names of the Principal Employees in the group

Indicate whether each of these people is currently employees in this activity. Indicate whether they are senior managers.

Telephone and fax numbers

Name and addresses of third parties also involved in this takeover

Telephone and fax numbers

Name and brief description of the activity or unit targeted for takeover

Division and Branch

Location(s)

Suggested benefits to the department in the takeover

Number of current employees affected

Access to real property required

r Yes r No r unknown

Access to intellectual property required

r Yes r No r unknown

Annual operating budget of the unit (if available)

Signatures of Principal Proponents

Date

Attachments (List)



Business Case Template

grphic Departmental Strategic Planning ...The following tool is designed to help departments and their employee takeover designates develop a business case for proposed takeovers. This tool should be used:

  •  
  • after the department has reviewed its programs and services and identified those that should be cut, those that the government should continue to deliver directly, and those that might best be delivered commercially;
  •  
  • after an employee takeover suitability assessment has identified that an employee takeover may be a feasible method of transferring the product or service delivery from the public to the private sector;
  •  
  • after a status quo analysis has been conducted (in the case of solicited proposals). In cases where the employee initiates the employee takeover process (unsolicited proposal), departments should conduct a status quo analysis before completing the business case; and
  •  
  • throughout the employee takeover process to help evaluate the business plan, conduct negotiations with employee takeover proponents, and finalize the employee takeover contract. The business case should be considered a "living document" that can change during the takeover process to reflect a change in circumstance.

Departments should next assess the costs and benefits of an employee takeover, preferably by using a business-case approach. They should ensure that such takeovers can withstand the test of public scrutiny with respect to prudence and probity.

The business case documents the feasibility of the proposed employee takeover. It outlines the strategic and economic rationale for a course of action. The business case includes a costing analysis of the proposed course of action, and the associated advantages and disadvantages. The department develops it and uses it as background when deciding whether to accept an employee takeover proposal, and the degree of preference for the takeover. The following points should be noted in preparing the business case:

  • This document provides a generic business case framework, including a series of key questions that departments should ask. A standard set of questions would neither suit all cases, nor provide an exhaustive list of the relevant factors departments should consider in each situation. Departments can use this tool as a starting point to develop their business case, but will have to tailor it to their particular program or service.
  • Departments may benefit from developing a set of principles to guide the employee takeover process. These principles should encompass the main tenets of the Employee Takeover Policy and Guidelines, but reflect the unique circumstances of the employee takeover process in a particular department.
  • In cases where departments are considering an employee takeover for a broad range of programs or services, a business case for each takeover may not be needed. Departments may group the takeovers to make it easier to develop a business case.
  • Not all the information required for preparing the business case, especially information on costs and revenues, is readily available. In some cases, assumptions must be made about the potential costs or savings. In such cases, departments should make sure they clearly spell out the assumptions, and that the rationale behind them is well documented. Once the business plan for the proposed employee takeover comes forward, the department can review the information on costs in the business case.
  • Where the employee takeover involves Crown assets, departments may want to value these assets according to current market values. However, these rates may not always be available. Departments should consult the appropriate Treasury Board Secretariat publications for guidance, or where possible, estimate the value of the assets based on the information available, such as benchmarking to similar assets. The rationale behind the estimates should be clearly documented. The purpose of assigning value to an asset is to help negotiate an employee takeover contract. There are specific rules for disposing of an asset, and departments should familiarize themselves with these prior to disposing of any Crown asset.
  • The federal government considers issues such as quality or continuity of service important. However, it is often difficult to assign value to these. A strong business case will demonstrate that these types of issues have been factored into the business case analysis along with other issues that are more easily quantified.

The business case template builds on Appendix B: Departmental Guidelines for Employee Takeovers, Section 4: Analysis. It provides the steps to build a business case, a series of questions to ask as part of the business case analysis, and a table of contents to summarize that analysis. The employee takeover designate may use the summary to present the results of the business case analysis to the deputy head


Building a Business Case

Step 1: Getting Started

According to the Employee Takeover Policy, the department, by this point, should have:

  • conducted a strategic planning exercise identifying the existing product or service for alternative service delivery; and/or
  • conducted an employee takeover suitability assessment for this particular product or service indicating the feasibility of looking more closely at the takeover option; and
  • defined the status quo (in cases where the department has solicited employee takeover proposals). If the department is developing a business case for an unsolicited employee takeover, the following questions should be asked:
  • Define the existing service that the proposed employee takeover would provide to the government:
  • type of product or service;
  • main client (government departments, the public/external groups, and other links);
  • level of demand for the product or service (now and in the future);
  • changes in the organization/policies/regulations that could affect the level of demand for the product or service;
  • existing costs to the federal government of delivering the service (if a mixed scenario exists - partial in-house and partial contracting out of product or service - what is the breakdown of costs);
  • monitoring; and
  • continuity and quality of service.

Departments should complete these tasks before proceeding to Step 2 of the business case analysis.

  • At this point, the department should be reaching a decision through the business case. Typically, deciding on an employee takeover means supporting a transition to commercialization.

Step 2: Describe the Options

  • Describe the various service delivery options available. Some generic options are:
Tip: Departments should examine only those options which they consider to be feasible.
  • status quo - in-house delivery/mix of in-house and contracting out;
  • a competitive contract - affected employees can compete with the private sector for a contract; and
  • a non-competitive directed contract to employees (for a fixed period of time).
  • What are the pros and cons of each option?
Tip: In weighing these options, departments should consider factors like the size of the program or service, number of competing proposals, and the level of support committed in writing from the deputy head.

Step 3: Conduct a Cost Analysis

  • What are the anticipated costs to the federal government under the proposed options?
Tip: It is important to ensure that the comparison of costs and revenues for the options is based on similar factors in terms of the nature and level of service provided; consider relevant costs/revenues only.
  • Is there a continuing need to retain any of the assets associated with the product or service because of the proposed options?
  • What is the value of the relevant assets?
Tip: The purpose of assigning value to an asset is to help negotiate an employee takeover contract. There are specific rules for disposing of an asset, and departments should familiarize themselves with these prior to disposing of any Crown asset.
  • intellectual property;
  • real property; and
  • materiel.
  • What are the costs of retaining versus disposing of these assets?
  • Under what terms will the transfer, sale or lease of each asset likely be carried out?
  • What are the transition costs, including the estimated workforce adjustment costs associated with the options?
Tip: include all costs that would be incurred before the employee takeover contract comes into effect.
  • What are the projected revenues of the proposed options?
  • What are the projected "second wave" savings - indirect/overhead savings associated with the proposed options?

Step 4: Determine the Human Resource Impact on the Department

  • What are the human resource impacts of the proposed options?
  • How many staff will be affected under each option? What are the number of potential lay-offs? What are the "reasonable job offer" implications? Were the workforce reduction costs considered in Step 2?
  • What are the proposed strategies for dealing with affected staff?
  • What percentage of existing employees will the new company employ?
Tip: The business case for an employee takeover is strengthened when the new company agrees to hire employees whose employment would otherwise be affected by discontinuing the internal delivery of the service.
  • Will any portion of delivering the product or service remain in-house? If so, how will this portion continue to be managed?

Step 5: Conduct a Risk Assessment

  • What are the risks associated with the proposed options?

Tip: This section does not only emphasize determining the potential risks, but also identifying what specifically could go wrong, and how to lessen that probability.

  • public perception that the decision to proceed represents better value to the Crown;
  • financial risks;
  • accountability/political risks;
  • third party liability risks for leased or rented equipment;
  • legal risks;
  • continuity and quality of service risks, including availability of the essential human resource expertise to provide the product or service;
  • non-compliance with legislative and regulatory requirements;
  • risk to the government in developing and depending on a sole source provider for a product or service;
  • risk of the new company failing; and
  • potential impact on other parts of the organization and on the program mandate.
  • What specific risks are associated with differing contract arrangements (e.g., competitive vs. non-competitive)?
  • How severe and probable is each identified risk?

Tip: Departments may want to use a risk matrix to help evaluate the potential severity (s) and probability (p) of risk associated with each option.

  • Assess the seriousness of impact for each risk by determining what the impact would be on a scale from 1 (not serious) to 10 (extremely serious) if the risk were to occur.
  • Assess the probability of occurrence for each risk by determining what the probability is, on a scale from 1 (extremely low probability) to 10 (very high probability), that the risk will occur.
  • Calculate risk potential (s x p) for each risk - higher numbers indicate significant risks that may require you to intervene by negotiating or contingency planning if you select that option.
  • Making a good decision does not necessarily mean selecting the option with the lowest level of risk. The key to making a good decision is to select the best option that has a manageable level of risk.
  • How can the risks be managed? What are the strategies for lowering the probability of a problem occurring? What is a feasible contingent action plan?

Examples could include:

  • right to terminate;
  • bonding;
  • holdbacks;
  • staggering the completion dates of multiple related contracts; and
  • broader communications.

Step 6: Assess the Monitoring Implications

  • Identify some potential methods for monitoring the performance of the proposed options.
  • What type of deliverable is it?
  • What is the timeframe?
  • How often should the measurement be taken?
  • Is the help of outside parties needed?
  • Who should be monitoring the performance?
  • What types of monitoring information will the department receive?
  • changes in shareholder ownership
  • financial statements
  • How often should monitoring information be collected?
  • How should the monitoring information be presented? Acted upon?
  • How will performance problems be dealt with?
  • holdbacks
  • audit financial statements

Step 7: Assess Value to the Crown

  • Overall, how do the proposed options provide value to the Crown?
  • cost saving of contracting with the entity;
  • achieve other program objectives (i.e., economic development, skill or technology transfer);
  • realize new revenues (i.e., royalties).
  • What adjustments could be made to the existing business case to increase value to the Crown without diminishing the option's appeal?

Sample Table of Contents for Summarizing the Results of the Business Case

Below is a suggested table of contents for summarizing the results of the business case analysis. The designate may find this format useful for presenting the results of the analysis to the deputy head.

Recommendation

  • rationale for decision to proceed, or not to proceed, with a particular option; and
  • source of value to the Crown by proceeding with the option.

Assessment of Value to the Crown

  • description of how the proposed option provides value to the Crown.

Definition of the Service

  • detailed description of the existing product(s) or service(s) that the proposed option will provide.

Tip: This becomes the statement of work.

Cost Analysis

  • summary of existing costs to the federal government of delivering the product or service; and
  • summary of projected costs and revenues to the federal government of the proposed option.

Human Resource Impact

  • description of the human resource impacts of the proposed option.

Monitoring Implications

  • description of monitoring implications of the proposed option.

Risk Assessment and Management

  • summary of the results of the risk assessment of the proposed option.

Employee Takeover - Business Plan Assessment

graphic Departmental Strategic Planning ...This tool outlines what the departmental designate should look for in a business plan. The purpose is to provide background information and guidance to the departmental designate in reviewing business plans for an employee takeover of programs and/or services.

The departmental designate should have the assurance that the employee takeover company assuming responsibility for a program and/or service is operationally capable and financially viable. All proposals for employee takeovers should include a sound business plan that demonstrates the proposed company's ability to meet the program and/or service requirements in the long term in a cost-effective manner.

Although business plans will vary in style and presentation, they should contain certain standard elements. All significant areas should follow a logical flow of information and be addressed and presented clearly. A business plan should clearly describe the employee takeover company as it is proposed, where it is going and how it is going to get there. Glossy packaging and fancy wording should not obscure the intent of the owner-managers. The proponents' ability to present this information concisely and logically can reflect their management ability. A suggested table of contents for a business plan is shown to the right.

The business plan is commercial, confidential information, and the departmental designate should make sure that access to this plan is based on need.

Executive Summary

An effective business plan begins with a summary that provides readers with an overview of the business plan. It should contain preliminary information on the objectives and goals and planned strategies and highlight financial considerations.

1. Introduction

The introduction identifies the proposed program and/or service to be taken over and general characteristics of the proposed employee takeover company. The employee takeover company would likely be one in which employees own shares.

2. Business Environmental Analysis

A detailed analysis of all significant environmental influences must be conducted. The business plan should demonstrate that the proponents accurately understand the environment they would be operating in as well as all the risks and opportunities.

2.1 General Business Environment

The business plan should contain an analysis of the current and anticipated future demand for the program and/or service. Since the department is a key client in the first few years, factors that could affect its future demand for services should be stated. If expectations of future demand differ from historical trends, rationale that appropriately supports these expectations should be provided.

The market for services outside the department should be assessed. This market includes other federal government departments, other public sector organizations and the private sector. The business plan should contain a description of the general characteristics of this market including buyer attitudes and habits and geographical location and size.

The effect of technology on the specific program and/or service should be addressed. Any changes expected in the future because of technology should be noted. Cultural and social factors that could affect the future demand for the program and/or service should also be indicated.

2.2 Competition

The business plan should profile the current supplier market. Their relative strengths and weaknesses should be noted including a description of their financial position and their management capability. If a business plan does not discuss this, the proponents have not dealt with a key area with significant implications for the future.

If the current supplier market consists of a few companies that have been in business for many years, it may be difficult for the employee takeover company to position itself to ever successfully compete against these companies. On the other hand, if the supplier market consists of many small young companies, it would be meaningful to know why the supplier market is not more mature (e.g., are there inherent risks in providing these services?). A description of where the employee takeover company would fit compared to the competition may indicate the company's possible success. A significant departure from the competitors' key characteristics would raise concerns that the employee takeover company may not be effective in delivering the programs and/or providing the services.

Introducing an employee takeover company into the marketplace that delivers programs and/or provides services to a federal department could affect the competing market. If this is a sound business venture, it is reasonable that the other companies will be aiming to position themselves to compete to deliver the programs and/or provide the services in the future.

2.3 The Employee Takeover Company

Background information on the factors that led to forming the employee group and developing the employee takeover proposal would provide valuable insight into the possible effectiveness of the proposed company. A stated business philosophy or mission statement indicates that the company is serious about working towards a goal.

Details of the planned incorporation and a description of the proposed share structure strengthen the takeover company's business plan. A company does not need to be incorporated before submitting its business plan. If the company will be delivering programs and/or providing services in more than one province, federal incorporation may be advantageous. If the company will be operating in one province only, incorporation in that province may be preferable. Also, the type of business may determine whether provincial or federal incorporation is required. The business plan should describe the decisions made about the number, classification and relative ownership of shares of the proposed company.

The programs and/or services that the company plans to provide and the operating structure to deliver them should be described. This would include an overview of the business processes and a description of the location and facilities of operations. The business plan should detail the departmental data required by the employee takeover company to carry out its proposed functions. It should be clear that the company is focused on the program and/or service it will provide and is capable of efficiently providing it.

The business plan should contain an organizational structure outlining the reporting relationships and responsibilities of the key management positions including a profile of the employees who will be filling these management positions. A strong board of directors, with members with relevant business experience, can be an asset for a start-up enterprise. If a board of directors is being proposed, its members, their expertise and roles should be described. A general description of the characterisitics and number of employees should be provided. An appropriate mix of complementary skills must exist. Although an employee takeover company is likely to have employees with extensive knowledge and ability in delivering the programs and/or providing the services to be taken over, they may lack the required expertise for managing a small business in the private sector. To compensate for a lack of expertise in certain areas, the takeover company should indicate a plan for recruiting the necessary individuals and/or developing the required skills.

Proponents should clearly identify their business strengths. The most significant is to deliver programs and provide services by employees previously employed by the department to carry out these same functions. Knowledge of government delivery or the program mandate may produce other business strengths. The takeover company's long-term viability should be assessed in the context of these strengths. The seriousness of the proponents about the takeover could also be questioned. The departmental designate will want the assurance that the program or service that the takeover company delivers or provides represents good value to the Crown.

The business plan should state the type and extent of the takeover company's business insurance. Depending on the program to be delivered and/or the services provided, the employee takeover company may want to be bonded. An insurance company issues a bond which generally guarantees the performance of a contract.


3. Objectives, Goals and Strategies

3.1 Objectives and Goals

As with any plan, the employee takeover company must have a clear idea of what it wants to achieve and how it is going to achieve it. The timeframe should cover at least three years and include the level of profit being targeted. Service level standards the company plans to maintain should also be noted.

An employee takeover can occur where the department will be the sole customer and the only reason for the takeover is to increase efficiency. Most takeover companies have plans to target other specific markets in the future. If the business plan indicates that the only current and future market for the service is with the department, this may reflect a lack of innovation and unrealistic dependence on one client. A business plan that has serious plans of expanding its customer base strengthens the case that it will be a viable company in the long term. After an initial three-year contract, the company should be prepared to compete with other suppliers in delivering the programs and/or providing services for the department if still required at that time. Market research increases the credibility of the projections and target. It should provide information on business lines, size, age and location of targeted markets.

The intention to develop other lines of business should be noted in the business plan and these should extend from the initial business line. Effective diversification protects a company from seasonal variations in demand and market fluctuations in any given business line.

The proponents must be realistic in their target market areas. Companies that focus on delivering programs and/or providing services with which they have a competitive advantage and target a particular market segment generally succeed. This is much more effective than trying to be "all things to all people."

3.2 Strategies

A business plan should clearly detail the strategies to achieve the objectives and goals noted. For example, if the company plans to expand its share of the market, the marketing plan to achieve this should be noted. A marketing plan should contain information on pricing, profile of targeted customers and advertising methods. Some companies can effectively determine what they want to achieve but have difficultly in determining how to do it.

To maintain certain service standards and provide top quality service requires investing in the company's employees. Details of recruitment plans, training and quality control procedures should be outlined.

A plan for capital assets is important. A description of existing assets and plans for future additions should be noted. Any proposal or expectations for the company to acquire the necessary assets from the department should be outlined.


4. Financial Considerations

The business plan should include a detailed financial forecast for the operations. The appendix should have at least a detailed three-year forecast. The proponents should consult professional advisors in preparing and developing these forecasts.

Information on sources and uses of funds and more specific cash flows is particularly important. One of the main challenges for a start-up business is providing a good cash flow.

Since the revenue will come from fees charged for services rendered, the fee rate structure of the programs and services should be provided. All costs associated with providing these programs or services should also be captured. Business activities should be grouped into categories that are similar in nature whether in gross margins or by geographical distribution. Stategies for growth and expansion need funding so the proponent must address these in the business plan.

The key assumptions made in developing the forecast should be noted. This allows the reader of the business plan to assess the reasonableness of the assumptions and the financial forecast. A break-even point should be presented. This would indicate the level of activity required to cover operational costs.


5. Risks and Opportunities Assessment

It is better to identify risks than to pretend they do not exist. For example, contingency plans should be presented to deal with variations in expected demand for services. If the company identifies risks and outlines sound courses of action to deal with them, then it has considered all possibilities.

Opportunities noted throughout the business plan should be highlighted with plans to capitalize on them. A business plan that does not deal with business risks and opportunities clearly indicates that the organization is not prepared for the challenges ahead.

Business Plan Review Checklist

To evaluate an employee takeover proposal, a business plan must answer the following questions:

Check ( ) to indicate that the business plan contains the necessary information.

1. What is the general business environment that this company will be operating in?

r current demand for services;

r anticipated future demand for services;

r market outside of the department;

r impact of technology; and

r cultural and social factors.

2. What are the characteristics of the employee takeover company?

r legal form;

r ownership structure;

r equity investment;

r control of the company;

r capital assets; and

r location of facilities.

3. What is the profile of the competing supplier market?

r strengths and weaknesses; and

r compared to the employee takeover company.

4. What products and services will be provided?

r products and services

5. What are the main business processes supporting these programs and services?

r description of main business processes

6. What are the risks involved with providing these programs or services?

r description of risks

7. What strategies will deal with these risk areas?

r risk management strategies

8. How many employees does the employee takeover company plan to have?

r number of employees from the department to be given offers

r profiles of employees from the department to be given offers

9. Who are the key employees and what are their qualifications?

r key employees (including managers)

r description of their qualifications

10. What are the employee takeover company's business strengths?

r business strengths

11. What are the employee takeover company's objectives for the next three years?

r markets to be targeted in the future; and

r other lines of business to be developed.

12. What are the planned strategies to achieve these objectives?

r planned strategies

13. What are the requirements for capital assets?

r description; and

r financing arrangements.

14. What are the employee takeover company's financial requirements for the next three years?

r pro forma income statement;

r pro forma cash flow;

r key assumptions; and

r break-even point.

15. What is the proposed fee rate structure?

r compared to other providers; and

r compared to internal costs.


Basic Employee Takeover Proposal Review Checklist

The departmental designate uses this tool when receiving an employee takeover proposal, developed after the deputy head has agreed to the expression of interest, to verify that the proposal contains all the required information. It also guides employee associations in preparing their proposals.

Check ( ) to indicate that the proposal contains the necessary information.

Identifying Information

r Name of the employee company or association proposing the takeover

r Name and location of the unit proposed for takeover

r Names, addresses and phone numbers of all the government employees who are principals in the employee takeover

r Names, addresses and phone numbers of any third parties involved in the employee takeover

r Signatures of all principals, witnessed

r Date of submission

r Is this the only employee takeover proposal pertaining to this government operation?

r Does the scope of the proposal extend beyond the boundaries of the department to other departments?

Proposed Conditions of the Employee Takeover Contract

r Proposed duration of the contract

r Annual value of the contract

r Total value of the contract

r Proposed revenue sharing arrangements (if applicable)

r Method of payment, including cash phasing

r Repayment of contributions (as per applicable contributions agreement)

r Guarantees

r Requirement for Treasury Board submission

Information on the structure and financial viability of the Employee Takeover Corporation

r Corporate ownership and organization structure clearly identified (President, Vice Presidents, Corporate Secretary and Treasurer roles at a minimum)

r Is the employee takeover corporation incorporated? (specify jurisdiction)

r Names and business/management experience of officers of the corporation (evidence of business acumen)

r External directors and their business experience identified

r Business plan provided (including pro forma financial statements)

r Employee share ownership plans identified (if applicable)

Continuity of Service

r Evidence that the employee takeover corporation has the technical capability to continue the required level of service

r Evidence that the employee takeover corporation has the managerial capability to continue the required level of service

r Evidence that the employee takeover corporation has the financial capability to continue the required level of service

r Evidence that the employee takeover corporation has the official languages capability to continue the required level of bilingual service

Human Resource Impacts

r Total number of employees affected by the employee takeover

r Total number of employees the takeover corporation proposes to employ

r Information on terms and conditions of the employee transfer

r Information on the status of employee transfer offers

r Evidence that the senior management post-employment guidelines have been addressed

Requirement for Other Assets

r Proposed acquisition or leasing of intellectual property - items identified and terms and conditions of the acquisition/leasing clearly stated

r Proposed acquisition or leasing of real property - sites identified and terms and conditions of the acquisition/leasing clearly stated

r Proposed acquisition of supplies or other materiel - items identified and terms and conditions of the acquisition clearly stated

Economic Development Benefits

r Relevant economic development benefits identified (if applicable)

r Regional presence identified (if applicable)


Employee Takeover Contract Review

Checklist for Reviewing Contract Documents

1. Identifying Information

Location (region)

Branch:

Contract Title:

Contract #:

Statement of services

Identification of parties (Crown and employee takeover corporation)

Identification of principals within the employee takeover corporation (refer to definitions in the Employee Takeover Policy and section 6.9 of the policy)

Identification of third parties (if relevant refer to definitions in the Employee Takeover Policy and section 6.6 (d) of the policy)

2. Duration of Contract

If non-competitive, contract not to exceed three years (refer to section 6.6 (b) of the Employee Takeover Policy and sections 4.2 (c) and (e) of the guidelines)

If non-competitive, contract not renewable (refer to section 6.6 (b) of the Employee Takeover Policy and sections 4.2 (c) and (e) of the guidelines)

Dates specified (beginning and end)

3. Financial Conditions Pertaining to the Employee Takeover

Total amount

Terms of payment

Total value not to exceed authority delegated to the department (refer to section 6.7 of the Employee Takeover Policy and section 4.2 of the guidelines)

If revenue sharing, provisions within the departmental authorities

If contributions were made to the employee takeover association, provision for repayment of these contributions (refer to section 6.8 of the Employee Takeover Policy and section 2.7.2 of the guidelines)

Abatements of contract price identified (if relevant; refer to section 2.1 of Employee Takeover Policy, Appendix C)

4. Conflict of Interest

Verify that no conflict exists (refer to section 6.3 and 6.4 of the Employee Takeover Policy and sections 3.1.2 and 7.1 of the guidelines)

If potential for conflict of interest, provisions to prevent such conflict (refer to sections 3.1.1 and 3.1.2 of the employee takeover guidelines)

5. Human Resource and Employment Continuity

Levels of employment of former Public Service employees in a employee takeover corporation (refer to section 6.11 of the Employee Takeover Policy and section 6.4.3 of the guidelines)

Terms of employment of former Public Service employees constituting contiguous employment (refer to section 1.1 of Appendix C of the Employee Takeover Policy)

Personnel screening requirements, including reliability check

Resignation of principals (refer to section 8.2 of the employee takeover guidelines)

Restrictions on new principals (refer to section 6.4.4 of the employee takeover guidelines)

Provisions of post-employment guidelines

6. Performance Requirements Specific to Employee Takeover Situation

Official languages (if relevant; section 6.13 of the Employee Takeover Policy)

Requirement for retention of records and/or working papers

Requirement for performance guarantees, such as holdbacks or bonds (if relevant; refer to section 6.4.5 of the employee takeover guidelines)

Warranty (see sample)

7. Intellectual Property Rights

If existing intellectual property transferred, refer to sections 5.4.1, 5.4.5 and 6.4.2 of the employee takeover guidelines

Provisions for new intellectual property created under the employee takeover corporation (see sample)

8. Other Property, Equipment and Facilities

If provided by the Crown - terms and conditions

If transferred from the Crown, refer to section 6.12 of the Employee Takeover Policy and sections 5.4.3, 5.4.4 and 6.4.2 of the guidelines

9. Assignment

Restrictions on assignment (refer to section 6.6 (e) of the Employee Takeover Policy)

10. Notice

If non-competitive, notice of award (refer to section 4.2 (c) and (d) of the employee takeover guidelines)

11. Termination

Terms for termination or suspension of the contract


Sample Pro Forma Balance Sheet

Year 1

Year 2

Year 3

Assets

Current Assets
Cash
Accounts receivable
Inventories
Prepaid expenses

Fixed Assets

Total Assets

Liabilities and Shareholder's Equity

Current liabilities
Accounts payable and accrued liabilities
Other payables

Long-term Debt

Shareholders' Equity
Capital stock
Retained earnings

Total Liabilities and Shareholders' Equity

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.
Revenues

Receipts/Billings

Interest

Other

Total Revenues

Expenses

Salaries

Benefits

Rent

Advertising

Office Supplies

Telephone

Postage

Professional Fees

Travel

Insurance

Depreciation

Bad Debts

Loan Interest

Other

Total Expenses

Profit (loss) before Taxes

Taxes

Net Income


Sample Pro Forma Cash Flow Statement

Jan.

Feb.

March

April

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Source of Cash

Beginning Cash

Total Revenue

Decrease (Increase) in Accounts Receivable

Proceeds from Disposition of Fixed Assets

Depreciation

Non-Cash expenses

Total Sources

Uses of Cash

Total Expenses

Decrease (Increase) in Accounts Payable

Principal repayment on Long-term debt

Additions to Fixed Assets

Total Uses of Cash

Ending Cash



Resource List

Sources of information

  • Regional economic development authorities - incorporation information
  • Business and trade associations - information, networking opportunities through association meetings
  • Accounting firms - guides to financial, tax and accounting considerations of starting a new business; guides to preparing a business plan
  • Law firms - advice on contract development and negotiation
  • Chartered banks - business planning and financing information
    For example: Scotiabusiness Plan Writer; Royal Bank: Starting Your Own Business
  • Community colleges and other training providers - courses on how to start your own business, financial planning, business planning
  • Community libraries - all types of reference materials in the business section
  • Book stores - all types of reference materials
  • Federal and provincial governments

Example:

Ministry of Economic Development, Trade and Tourism (Ontario)

  • Business planning for small business

Revenue Canada

  • Corporation income tax information
  • Goods and Services Tax registration information

Local municipalities

  • Business license, permit information

Department of Industry - market and competition information

  • Internet address for Industry Canada Home Page

http://strategis.ic.gc.ca

  • Entrepreneurship Centres and Business Service Centre across Canada

Entrepreneurship Centres: Information on starting up new businesses.

Ottawa

Entrepreneurship Centre
Ground Floor, 111 Lisgar Street
Ottawa, Ontario
K2P 2L7

Tel: (613) 560-6081
Fax: (613) 560-2102

Hull

Entrepreneurship Outaouais
7th Floor, 25 Laurier Street
Hull, Quebec
J8X 3Y5

Tel: (819) 595-3403
Fax: (819) 771-9846

Canada Business Service Centres: To provide small businesses with a single access point for information on federal and provincial government programs, services and regulations related to business

Ontario

Canada-Ontario Business Call Centre
Toronto, Ontario
M5V 3E5

Tel: (416) 954-4636 or
1-800-567-2345
Fax: (416) 954-8597

Quebec

Info entrepreneurs
Suite 12500, Plaza Level
5 Place Ville Marie
Montreal, Quebec
H3B 4Y2

Tel: (514) 496-4636 or
1-800-322-4636
Fax: (514) 496-4010

Newfoundland

Canada Business Service Centre
90 O'Leary Avenue
P.O. Box 8687
St. John's, Newfoundland
A1B 3T1

Tel: (709) 772-6022 or
1-800-668-1010
Fax: (709) 772-6090

Manitoba

Canada Business Service Centre
8th Floor, 330 Portage Avenue
P.O. Box 981
Winnipeg, Manitoba
R3C 2V2

Tel: (204) 984-2272 or
1-800-665-2019
Fax: (204) 983-3852

Prince Edward Island
Canada Business Service Centre
232 Queen Street
P.O. Box 40
Charlottetown, P.E.I.
C1A 7K2

Tel: (902) 368-0771 or
1-800-668-1010
Fax: (902) 566-7098

Saskatchewan
Canada Business Service Centre
122 - 3rd Avenue North
Saskatoon, Saskatchewan
S7K 2H6

Tel: (306) 956-2323 or
1-800-667-4374
Fax: (306) 956-2328

Nova Scotia

Canada Business Service Centre
1575 Brunswick Street
Halifax, Nova Scotia
B3J 2G1

Tel: (902) 426-8604 or
1-800-668-1010
Fax: (902) 426-6530

Alberta

Canada Business Service Centre
Suite 122, 9700 Jasper Avenue
Edmonton, Alberta
T5J 4H7

Tel: (403) 495-6800 or
1-800-272-9675
Fax: (403) 495-7725

New Brunswick

Canada Business Service Centre
570 Queen Street
Federicton, New Brunswick
E3B 6Z6

Tel: (506) 444-6140 or
1-800-668-1010
Fax: (506) 444-6172

British Columbia

Canada Business Service Centre
601 West Cordova Street
Vancouver, British Columbia
V6B 1G1

Tel: (604) 775-5525 or
1-800-667-2272
Fax: (604) 775-5520

Note: Businesses in the Northwest Territories should direct their enquiries to the Manitoba CBSC. Businesses in the Yukon should contact the Alberta CBSC.


Other Selected References

Cohen, G., Nigel. (1992). The Business Plan - Approved. Vandenburghs Chartered Accountants.

Cohen, William A. (1995). Model Business Plans for Service Business. John Wiley & Sons, Inc.

Global LifeSkills Inc. (1995). How to Start or Improve Your Own Business: Your Home Office and Small Business Program. (Information package and video)

Mancuso, Joseph R. (1993). How to Prepare and Present a Business Plan.
Prentice Hall Press.