< Return to News Articles

Good Options for Owners: ESOP versus Third Party Sale

by John Howe

Taking the ESOP route is not an all or nothing approach to business ownership transition.

A presentation “Comparing the Big Exit Decision” by Steve Cohen, Esq and Tabitha Croscut, Esq. at AMAA New England in Boston September 28 made this clear. The two attorneys with Devine Millimet engaged in a back and forth, point counter-point discussion that brought to light the advantages and disadvantages of choosing to pursue an ESOP or a third-party sale.

Owners could choose to sell a minority of their company to the Employee Stock Ownership Program while remaining in charge of the company. This is a great way to develop liquidity as part of a bigger transition plan. The owner sells part of the company to an ESOP and pulls capital locked in the company out for financial planning. This counters the proverbial all-your-eggs-in-one basket approach many owners face, where year after year they pour their capital back into their company rather than having a diversity of investments for retirement.

In the example mentioned above, it is still possible for the company to be sold down the road, even with an ESOP in place. A full ESOP transfer has some strong offsetting tax advantages, and can enable owners to essentially sell their entity to the employees, which can create tremendous goodwill for everyone if the company is healthy.

However, I would argue a full ESOP will not generate the maximum return for the owner. Attorney Cohen made this point clearly. A third-party sale, run through an M&A process that identifies multiple interested parties and generates a range of proposals, can be very effective in identifying the true value of a company in the marketplace at the time.

Strategic and synergistic buyers will often put a price on a company that exceeds the ESOP valuation, generating even more liquidity for the owner.

It is also arguable that a third-party sale would open even more opportunity for existing employees and management. The mantra in an acquisition is growing and expanding the acquired entity.

A properly positioned management team and crew can leverage a change in ownership into an opportunity to ratchet up their game to hit a new level of business. Contrast this to the attitude of mature private entities where the motivation sometimes is focused more on preservation than growth.

On the other hand, as Attorney Croscut argued, an ESOP can preserve jobs and a company’s position in a community. Sometimes the fear is a sale will result in efficiencies, job losses and upheaval as new owners seek profitability from the purchased entity. This fear can be gut-wrenching for owners in a sale.

Growth and new opportunity is possible under an ESOP transition. In this scenario, the management needs to keep its eye on the ball to maintain revenue and the company’s market position for the good of the beneficiaries of the ESOP. And there will be a trustee checking things out on a regular basis.

It is good to have options, and a solid company can be transitioned in various ways.

< Return to News Articles

BTS News

  • Looking Back to Plan the Future

    Looking Back to Plan the Future

    As one year closes; another is just beginning. It is an excellent time for company owners to consider the options for what is next.

    Read more >

  • Growth Through Acquisition in the Lower Mid-market

    Growth Through Acquisition in the Lower Mid-market

    Growth through acquisition has been a strategy largely used by mid-sized and larger companies for years. Now firms in the lower mid-market are getting into it as well.

    Read more >

  • PEI Cites 8 Attributes of Quality Deals

    PEI Cites 8 Attributes of Quality Deals

    Quality deal flow is among the top concerns for M&A advisors. A recent blog posted by Private Equity Information offers 8 key attributes of “quality deals.”

    Read more >

  • In an M&A Program: Why Consider a Business “Carve Out”?

    In an M&A Program: Why Consider a Business “Carve Out”?

    An M&A program need not be limited in the search to the complete acquisition of a company.

    Read more >

  • The BIA Report on Consumer Confidence

    The BIA Report on Consumer Confidence

    "NH consumer confidence remains high" according to the latest BIA Survey conducted October 10 and October 18, 2018 by the UNH Survey Center.

    Read more >

  • Business Transition Snippets

    Business Transition Snippets

    Here are a few observations we culled from sources we regularly review that relate to business transitions.

    Read more >

  • What to expect in the LOI exclusivity period

    What to expect in the LOI exclusivity period

    A question that often emerges when reviewing proposals for acquisition with owners is the exclusivity period.

    Read more >

  • Growth through acquisition isn't just for the big companies

    Growth through acquisition isn't just for the big companies

    Growth through acquisition Is a valid strategy for businesses in the lower mid-market as well as the mid-market.

    Read more >

  • The exit decision- timing and issues

    The exit decision- timing and issues

    When should a business owner start thinking about planning their exit? Early! This is a high-stakes decision and should not be first contemplated when it is imminent.

    Read more >

  • April PEG investments

    April PEG investments

    It is interesting to watch trends in private equity investments. In general, they reflect confidence in the value of making things. Transactions give insights on the broader acquisition environment, p

    Read more >

Case Studies

  • Precision Machining Company

    Initially, liquidation was a serious consideration. It would offer a quick exit but would hurt loyal employees and disrupt the customers who had come to rely on its quality production.

    Read more >

  • Green Product Company

    Our client owners could dig in for the long haul…However, this would take five years or more. Owners simply lacked the horsepower to do it.

    Read more >

  • Water Purification Company and Young Buyers

    Owners decided they wanted to retire. They also wanted to be fair to the staff who had been loyal to them. Could the company be sold, the staff retained and the facility remain in use?

    Read more >

  • Magnetics Company with High Profile Customers

    (T)he manufacturer would need to focus on growing EBITDA to capture interest from major strategic buyers and achieve a higher multiple of earnings.

    Read more >