The 1974 ESOP law and later amendments were designed to encourage employee ownership. Company founders who initially sell just part of their stake and stay on as CEO say the best news comes after the deal: employees start to act more like owners. Ideas formerly kept quiet start to bubble up. Costs, once resistant to reduction, come under control more easily.
By Stephen K Lehnardt
Sometime after 617 BC, Aesop told the fable of the Farmer and his Sons as follows:
A FATHER, being on the point of death, wished to be sure that his sons would give the same attention to his farm as he himself had given it. He called them to his bedside and said, "My sons, there is a great treasure hid in one of my vineyards." The sons, after his death, took their spades and mattocks and carefully dug over every portion of their land. They found no treasure, but the vines repaid their labor by an extraordinary and superabundant crop.
Regarding your business, once you have decided to sell, the million-dollar question becomes: "to whom?" If you have no successor in mind, have you considered your employees? Many business owners have discovered that selling their employees with an ESOP or “Employee Stock Ownership Plan” is very good business.
Like the fable, using an ESOP in the right situation creates treasure for the owner and the employees.
Much has been written on the topics of employee ownership and ESOPs. An excellent resource for preliminary information is the National Center for Employee Ownership which currently estimates that almost 12,000 ESOP plans are currently operating in the United States. If profit sharing, stock bonus plans, stock option plans, and 401(k) plans that invest in employer stock are added, almost 28 million employees participate in some kind of employee ownership plan—this is approximately 8% of corporate equity.
Whether you are considering a full exit from your business or simply a way to pull out capital, you must weigh the available options. To sell your business to a larger company may mean gutting the business to only those elements the buyer wants to keep. Likewise, venture capital means distilling the business to a profit-center to be used and sold for profit.
What if you have an established business with established and trustworthy employees – employees that might make good owners? Consider an ESOP. An ESOP allows the owners to sell and the employees to buy in a tidy package that helps everyone. Moreover, it preserves the business, and the legacy of the founders. The owners can even stay on as employees themselves and continue at the helm, if the deal is structured properly.
Indeed, an ESOP is not a strategy suited to everyone and every business. There are some cases where it went terribly wrong. Nevertheless, ESOPs are quite an intriguing and powerful option for a closely held business, and should always be considered when you begin to look for your exit plan. Feel free to call our office to learn more.
Reference: The National Center for Employee Ownership (2014) “ESOP (Employee Stock Ownership Plan) Facts”