Management Equity philosophy explained

As a Group, we follow a philosophy of Management Equity, where operating company senior management teams invest directly in the businesses they are responsible for, thereby aligning management and shareholder interests.

Senior management has the opportunity to retain or acquire shares in the operating company they are responsible for.

Management have the opportunity to create a meaningful capital value over time if they can grow the profit in their business. This works well with our decentralised structure, as the local management team run their business with a high level of operational autonomy.

This aligns the interests of management with Empresaria as a majority shareholder and it encourages a long-term view for the business. This is a key tool for both attracting good quality managers as well as staff retention.

At least 51% of the shares are owned by Empresaria.

Shares are retained by managers or acquired at fair value.

Shares can be offered for sale after a specified holding period.

Shares are sold over a 2-3 year minimum period.

Decision to purchase the shares is at Empresaria's sole discretion. No put options in place.

Decision based on each specific situation, with consideration of the management succession plan in place, the recent trading performance and projections for growth in the next few years.

Valuation basis agreed in shareholders agreement.

The valuation is typically based on the average profit after tax for the previous three full years before the shares are sold, using the Empresaria trading multiple (share price divided by last EPS) less 0.5, to ensure it is earnings accretive to Empresaria shareholders.The multiple is capped at a maximum of 10.

Where we acquire a majority stake in a business, the shares remaining with the founder management are called "first generation shares". There are no material changes to the rights belonging to these first generation shares retained by founder management. Our model also enables senior management to acquire "second generation shares". This will often be when the first generation shares have been acquired by Empresaria and we want to incentivise the next tier of management in the operating company to grow its business to the next level. Management buy these second generation shares at market value, investing their own cash, which is at risk if the business does not perform. To help lower the market value of the second generation shares (to make it affordable for management to acquire a meaningful stake in the business they are responsible for) and to protect the profit that we have already acquired, we set a 'threshold profit' level for valuing second generation shares. These second generation shares only start creating value for management if the profit grows above the 'threshold profit' level. The second generation shares typically have restrictions, such as limited or no entitlement to dividends and the fair value paid by the management shareholder reflects these restricted rights.
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