January 2022 How ESOPs can help Preserve a Founder / CEO’s Legacy Alberto Toribio Del Pilar| Blogs| Business Sale, Strategic Advice Founders and owners of businesses must weigh many factors when considering selling the company they worked a lifetime to build. There are, of course, financial elements to consider, such as how much cash a founder would receive at closing. However, there are important non-financial factors to consider as well. Among these other factors are the owner’s legacy in a given community and the well-being of employees after a sale of the business. For business owners weighing all the potential results of a contemplated transaction —including those not financial in nature — selling to an employee stock ownership plan (ESOP) may offer the most attractive path for transitioning ownership. While there are several financial incentives for owners to sell to an ESOP, such as the potential deferral of capital gains taxes, this article will highlight a few key non-financial benefits of this particular form of employee ownership. How important to you is your role and involvement in the community? When selling a company, owners usually consider how the transaction will affect their surrounding community. The question often asked is, “How will my community, and my role in it, be affected after the sale?” Selling to an ESOP can be just the right solution for owners who employ a relatively sizable percentage of the local population and whose professional and personal lives are intertwined in that same community. Selling to a strategic buyer or private equity firm can potentially lead to an immediate undoing of decades worth of business and civic engagement if jobs are lost or the local economy is diminished as a result of a transaction. This is especially true for businesses whose operations can easily be relocated. For example, consider a trucking company that operates in a rural area of the Midwest. A sale to a private equity firm or strategic buyer introduces the risk that a buyer could i) move the company’s operations to another state in pursuit of a more favorable tax environment, ii) downsize the company’s workforce to increase profits, or iii) install a new management team less concerned with the well-being of the broader community. There may be little an owner can do to prevent such decisions when relinquishing control of the company to a buyer motivated more purely by profit. On the other hand, as ESOPs provide sellers more flexibility with regard to their involvement after a sale, a founder is often in a better position to prevent layoffs and other undesirable outcomes. How actively involved do you want to be after the sale? Selling to an ESOP allows business owners to remain more involved in the company’s ongoing operations and strategic direction relative to a sale to a more traditional buyer. When selling to another company or private equity firm, sellers often have little say in the company’s leadership structure and strategy once the deal closes. As such, the ability to identify, train and promote new leadership from within existing ranks is a strong advantage of the ESOP ownership structure. ESOPs can provide founders and owners the time and space for a more thoughtful process as it relates to stepping away from daily operations. Following a sale to an ESOP, a seller, on average, usually remains involved in the company’s management for about three to five years. Typically, a seller will slowly transition from tactical, day-to-day operations to a more strategic role, such as the chair of the board of directors, focusing more of their time on mentoring the next generation of leadership and guiding the company’s strategic direction. This allows former owners to advocate for the next generation of leadership and continue to promote the company’s role in their community. Do you want to motivate and reward your employees? For many business owners, one of the most attractive features of an ESOP is the opportunity to provide a substantial retirement benefit to the employees who have helped build and grow their business. Whereas selling to a strategic or private equity buyer tends to offer limited financial benefit to employees outside of the company’s core management team, ESOPs provide an incremental retirement benefit to all qualifying employees. When companies perform well and experience continued growth, the ESOP benefit can be substantial and lead to long-term wealth creation for employees that may not otherwise be available. This unique aspect of ESOPs may be especially valuable today as popular attention has focused on disparities in wealth and the average American worker’s lack of retirement savings. ESOPs offer an opportunity for companies to facilitate the accumulation of wealth by employees by allowing them to more directly participate in the value created through their hard work and dedication. Moreover, an improvement in the alignment between a company and its employees, especially as it relates to morale and motivation, tends to be self-reinforcing, and improves a company’s long-term prospects. After weighing all the factors, is an ESOP the best choice? Selling your business is about more than just financial gain. Your legacy in your community and the long-term well-being of the employees who have helped build your company also carry meaningful weight when deciding on when and how to sell your business. We encourage business owners to weigh all the factors of a potential transaction — financial and non-financial — to determine what is best for their respective situations. An experienced advisor can help business owners evaluate their options effectively. As the first step in this process, ButcherJoseph provides a complimentary Feasibility Analysis that helps business owners understand the economics of a sale to an ESOP’s, as well as the potential impact to their company’s balance sheet, management structure, and the seller’s role in the company after the deal closes. If you are interested in learning more, contact us to see if a complimentary Feasibility Analysis is right for you. 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