How Berkshire Hathaway’s Acquisitions are Similar to an ESOP

How Berkshire Hathaway's acquisitions are similar to an ESOP

We work with many private company owners on their transfer strategies, and we are seeing increased interest and activity from owners who are considering an Employee Stock Ownership Plan (ESOP).

ESOPs have been around for a long time, but they are often viewed as an impractical strategy due their complexity and cost. This has changed with the advent of more completed transactions, better advisors, and more active participation from trade associations such as the National Center for Employee Ownership, which disseminates a lot of information and education about ESOPs.

From our conversations with business owners, it has become clear that the main driver of this increasing interest in ESOPs is the fact that they have more than one motive in their transfer strategy. All too often, third-party buyers convince private company owners that only one thing matters in a transfer – money. The fact is, most owners care about more than just money. The legacy of the business, its standing and contribution to the community, and the welfare of the company’s employees all matter to many owners.

An ESOP allows an owner to address their need for a liquidity event. It also allows the owner to make the transition in a planned way and on their time schedule, since an ESOP transfer can be accomplished in tranches over a period of years, as opposed to all at once. Additionally, an ESOP helps the owner maintain the company’s culture, protect employees, and ensure the company’s legacy. Many owners are willing to explore the complexities of an ESOP for the sake of these significant benefits.

This brings me to Berkshire Hathaway. Many view Warren Buffett as the greatest investor who has ever lived. In fact, he could also be called the greatest acquirer of operating companies. Since Buffett took control of Berkshire in 1965, the company has completed hundreds of acquisitions and it rarely sells anything. While statistics on the success of third-party transactions have very mixed results, Berkshire’s success rate with its acquisitions has been monumental. This success stems from its efforts to keep employees in place and preserve the culture, identity, and legacy of the businesses it acquires.

In his 2014 shareholder letter, Buffett explained why Berkshire’s approach is a better option than strategic buyers or private equity groups:

“Berkshire offers a third choice to the business owner who wishes to sell: a permanent home in which the company’s people and culture will be retained. Some sellers don’t care about these matters. But when sellers do, Berkshire does not have any competition.”

Your business may not meet Berkshire’s acquisition criteria. But if you have similar motives for transferring your company, you do have an alternative to an outright sale. Consider an ESOP.

Mario Vicari, Kreischer MillerMario O. Vicari is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.   

 

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