It’s funny how we often hear owners talk about their legacy and what they hope their company continues as, yet rarely do we also hear these same owners considering an ESOP. Why is that? An ESOP can be the answer to an entrepreneur’s prayers who really wants their business maintain its status in the community and retain its employees after a change in ownership. Even if you gained the business through succession planning, there’s no guarantee that your kid is going to want to take over the family business — so how are you going to find someone who would treat it like it was their own?
No, we’re not talking about soul-searching. It’s much simpler than that. You simply need to look at your management team and beyond to find the right fit for your company. Your own employees are often the fit you’re looking for and those interested in doing this will have way more buy-in with the business than an external hire. They’re more likely to care that the business carries on as it has in terms of culture, reputation and involvement. As such, they’ll do their best to ensure the transition is as smooth as possible.
Your staff know your vision, your mission and your quirks. They’ve spent years working shoulder-to-shoulder with you and understand exactly how finicky the business can be. Most importantly, they understand how important the business is to the community and take pride in its operations. And they’ve learned this all from you. Why waste this mentorship when it can help you achieve your legacy dreams?
Fit is underrated by first-time entrepreneurs, especially, though we all fall prey to considering typical investors like private equity. We all want that money! But once we get into the process, we start thinking about what will happen to John down in accounting, or Sarah in marketing or Dave in IT. We care about our people, as we should. But we rarely think of them as people who could eventually buy the business through an ESOP or other. In truth, if legacy and our people matter to us, we should think about this exit option first.
Money Can’t Buy You Happiness
It can buy you lots of things (a boat, a truck, etc.), but money really can’t make you okay with selling your company to the top bidder who is then going to sell it off, piece-by-piece, until that wonderful thing you built from the ground up is no more. What happens then? Do you feel alright with this vision of the future? What kind of legacy did you leave behind? Do you care? What happened to your employees? Is that neighborhood worse off?
Your ability to matter to a great number of people is one of the most rewarding experiences of being an entrepreneur. The intrinsic happiness that results from helping your community and your staff as a business entity is pretty profound. If you haven’t already started giving back in some capacity, you really should. The positive impact one business can have is quite large. Looking at what your business does for the community (from the jobs you provide to the outreach), wouldn’t you rather someone continue your good works? Perhaps even add to them?
Your employees can continue the efforts they’ve come to know and love, and possibly even use themselves. Engaging your staff in your business is one of the surest ways to secure key employees and increase your business relations — if they’re proud of what they’re doing and what the company stands for, it shows in their work. How they talk to customers and even how they talk about the company gets impacted by how engaged employees are.
While ESOPs will not get you top dollar for your business, you need to consider their value to you in terms of your legacy. If the terms and financing are good, you will get fair market value for your business, plus the knowledge you’ve secured your business for the future. If you have a case where going for the largest dollar value provided by a strategic buyer makes sense, by all means go for it. Every sale is unique, but it’s important to know all your options before you take that final step.
Any exit requires planning. An ESOP does as well. You need to look at your staff first — who on your team shines and exemplifies what your business stands for? Who knows your operations inside and out? And if that’s not everyone on your team, what can you do about it?
Now’s the time to clean house. Take a serious look at your team and evaluate if you have the right people in the right positions. ESOPs require a solid team and good buy-in from the staff who are going to take over shares in the company. You’ve also got to set the system up correctly so when employees decide they are done with the company, the business won’t be financially strapped at that time. So you need to plan.
Your financial advisor or wealth manager will be able to help you with this planning. Knowing the goals you have for legacy, succession planning will be high on the list as you progress through financial planning into your ESOP-oriented exit plan.
With the right people in the right places training the right way, you have the recipe for a very successful ESOP.
If you’ve got some specific questions about how ESOPs work (or how they could work for you), contact us directly. You can also check out these resources:
Tax Advantages of ESOPs
The Ultimate Guide to Your Best Exit Options (specifically on how ESOPs work).