< 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

  • M&A Trend Impacts Smaller Companies Too

    M&A Trend Impacts Smaller Companies Too

    Lower mid-market company sales are often influenced by larger M&A deal flow. A recent article on the Forbes website illustrates this point. Here’s why.

    Read more >

  • New Chapter for Polartec

    New Chapter for Polartec

    Many in New England will remember December 11, 1995 the day that Malden Mills, the maker of PolarFleece® and the employer of thousands, burned to the ground. The company made headlines again June 12.

    Read more >

  • A Good Process Gets Results

    A Good Process Gets Results

    Companies in the lower mid-market often are surprised when they attract attention from larger entities, even those whose balance sheets dwarf the target. Why do small companies attract this kind of in

    Read more >

  • M&A Tip- Make Sure We Know Your Goals

    M&A Tip- Make Sure We Know Your Goals

    It’s a good idea for owners to be clear about their goals when discussing the sale of their company with the M&A advisor.

    Read more >

  • M&A Advisor Tip: Intangibles Matter

    M&A Advisor Tip: Intangibles Matter

    Intangible assets can play a significant role in your business value. While these may not take physical form, they can be legally identified and transferred. It can be a hard exercise, especially w

    Read more >

  • Selling Your Business? Get Clear About Why

    Selling Your Business? Get Clear About Why

    We regularly have conversations with owners about selling. As part of these discussions we take time to talk about the ‘why’. This almost always leads to one of ten core factors, each of which req

    Read more >

  • Successful Acquisition Hinges on More Than Strategy

    Successful Acquisition Hinges on More Than Strategy

    In the current labor environment, it can be difficult to grow a business. Instead of hiring the talent you need to fuel organic growth, growth through acquisition can be another way to expand.

    Read more >

  • Three Things to Check

    Three Things to Check

    When you are preparing for a possible transition and sale, lots of things come to mind. Before you get too far along the path to dreams, consider these three things when preparing for the transaction.

    Read more >

  • What’s the M&A Outlook?

    What’s the M&A Outlook?

    The intense pace of mergers and acquisitions that shaped the Lower Middle Market last year is likely to continue through 2019, according to the most recent Market Pulse survey. The survey is a join

    Read more >

  • Why an IOI can help get a better LOI

    Why an IOI can help get a better LOI

    We generally include an Indication of Interest (IOI) in our sales process. This is not the same as an LOI – letter of intent - but is still an important part of the sales process. Here’s why.

    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 >