Me and My ESOP: A Look at ESOPs as a Private Company Transfer Strategy

The first part of this blog post’s title sounds personal. That’s because it is. One of the things I love most Me and My ESOP: A Look at ESOPs as a Private Company Transfer Strategyabout my job is that I get to see and hear firsthand what’s really important to my clients and what drives their business decisions. I’d like to share two stories about owners who decided to implement an ESOP.

Story #1 – I met with the owner of a company that did a partial ESOP several years ago and subsequently became a 100 percent owned ESOP in 2012. When I asked the owner why he settled on an ESOP, he said:

“These guys in my shop helped me build this business and have been loyal to me for years. I could not have done it without them. The business has provided a great life for me and my family, so it is important for me to take care of my employees as my way of showing how much I appreciate them (as he pounded his fist on his conference room table for emphasis). By doing the ESOP, I can make sure that they each get $200,000 to $400,000 when they retire.”

Story #2 – I was with a company owner who was contemplating an ESOP. We were asking him all the questions we as advisors are accustomed to asking when a client is facing such a major event. We finally got to the “why” question and here is what the owner said, with tears in his eyes:

“I know I could sell this business to a third party, but I cannot do that to my people. There are people in our company who started with me and have been loyal for 20 years. I know if I sell the company, our unique culture will be lost and it is likely that most of them would not be with the company in five years. I just can’t do it to them.”

Two different stories from two different companies and two different owners—yet both show the emotional side of running a business. I have dozens more like this if I had the space to write them all here. The consistent theme is that private company owners view their businesses differently—it can be very personal—and they often have a broad set of transfer motives beyond just money.

Every private company’s transfer strategy has to be approached differently because it needs to be based on the owner’s unique motives. That’s why we push owners to think deeply about those motives well in advance of the transfer. Owners are often emotional during this process, as they should be. It is one of the biggest decisions they will ever make, and it deserves thoughtfulness and planning. Private company owners build their businesses on their own terms, so why shouldn’t they transition them on their terms as well? Many transactional advisors will try to convince you otherwise, but the truth in most cases is that while money does matter, so do a lot of other things. And when an owner has multiple transfer goals, an ESOP can be one of the best vehicles to consider.

With private equity money widely available and large corporations in buying mode, the idea of just selling the business can be very attractive. And it can be tempting to focus almost exclusively on the money the transaction will bring. While money is a very important consideration when contemplating your transition method, we feel that focusing on it too much is a bit shortsighted. This is not to say that a third party sale is bad – it’s just that it is only one of many options depending on what matters to an owner – and all options should be considered.

We have seen a significant increase in the number of private company owners considering an ESOP as a transfer strategy because an ESOP can meet a broader set of needs and motivations for the owner. These include money, legacy, employees, community, culture, and the ability to continue to play a role in the company. There are tradeoffs, of course, but owners understand these tradeoffs and are often glad they chose the ESOP route.

Here are a few of the common reasons why an ESOP appeals to many private company owners:

  1. An ESOP can provide a full or partial liquidity event for the owner since the transaction can be a partial or full sale of the owner’s interest.
  2. An ESOP transition affords the owner the opportunity to continue to work and stay in their role if they choose. It offers an owner a level of control and allows a path to retirement on their terms and timing.
  3. Since the owner’s role does not change after the ESOP transaction, they can continue to gradually prepare for the leadership succession of the business, rather than an immediate transition.
  4. Owners who are motivated to take care of their employees can provide a significant additional retirement benefit for them through the ESOP.
  5. ESOP companies generally stay put. They remain in their communities, create local jobs, and continue the culture and legacy that is often important to the owner.

By the way, it’s really not their ESOP – it just feels that way to them. If you feel the same way about your business, perhaps an ESOP is the right choice for you.

Mario Vicari, Kreischer Miller

Mario 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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