We're both planning to attend the annual conference of the National Center for Employee Ownership in Pittsburgh next week. The prospect got us thinking about employee stock ownership plans, or ESOPs, which are even now one of the most misunderstood and underutilized devices in an entrepreneur's toolkit.
Let's review the bidding. At some point you will want to retire from the company you founded. If you don't have a son or daughter ready to take over, you will probably want to sell the business. (We hope it will be ready for sale; if you don't know what we're talking about, see this article.)
And who will be the buyer? Maybe your management team can scrape together the necessary capital—or maybe not. Maybe a strategic buyer or private equity firm will come along with an offer.
Corporate or PE acquirers are likely to give you a good price. But you'll undoubtedly be facing a big tax bill, and you won't have any say about what they do with the company once the transaction is complete. There's a good chance they'll consolidate it with other operations, strip your name from the door, and hand out pink slips to your loyal employees.
Alternatively, there's the ESOP, an arrangement that lets you sell your company to its employees, stay on as long as you want, and leave both your managers and your workers in place. You'll get favorable tax treatment on the proceeds of the sale—often enough to compensate for a lower price than you might get elsewhere. You'll also know that the company will continue on as an independent business.
Some business advisors will tell you to stay away from ESOPs. You'll hear that they're too complex and too expensive. That's often true for very small companies, but for a business of any size, it's nonsense. Every sale of a company, when done right, is complex and expensive. There's no way to avoid the lawyers, the lenders, and the accountants. And there are plenty of said professionals who are highly knowledgeable about ESOPs.
As seen in Forbes and written by Bill Fotsch and John Case.