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.
"The entire process went smoothly and professionally. The BTS team kept me fully informed at every step. They worked hard and were effective in bringing the deal home."
"Skip and I continue to be grateful for all you have done to make the sale of Pure Flow come to fruition."
"BTS’s level of expertise in the process and close attention to detail enabled us to successfully navigate the deal."
"These types of transactions are often long and complicated and I doubt it could have been successfully completed without your close ongoing involvement."
"The outside objective point of view that you have brought us has been invaluable as we prepare for the rapid growth."
"John then found the right buyer and coordinated a seamless transition—he doesn’t miss a single detail."
"John immediately identified our strengths and experiences and discussed a business that ultimately was more in line with our goals."
"The BTS team came in, evaluated everything in a professional and thankfully non-threatening manner."
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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.
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.
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?
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.