In DeWitt’s ESOP practice group, we are often asked: what type of company is a good fit for an ESOP? This question comes from an outdated perception that an ESOP is a good fit only for manufacturing companies and/or very large companies.
The reality is that fitness for an ESOP is less about the type of industry or size of a company, and more about identifying the primary succession planning priorities for the company’s current ownership.
In other words, the question is not: “What type of company is a good fit for an ESOP?” The question is: “What type of seller is a good fit for an ESOP?”
Although some might call us “ESOP evangelists,” we describe our mindset differently. Our goal is to educate the business community about which succession planning priorities are best served by an ESOP. We know that ESOPs are not (*gasp*) a good fit for every seller. However, for sellers whose succession priorities align with the tried-and-true benefits of an ESOP, employee ownership might be a near-perfect option.
Here are some of the common priorities of any business sale:
- Maintaining company legacy;
- Obtaining the highest possible sale price;
- Receiving high liquidity at close of sale;
- Minimizing customer disruption;
- Rewarding key employees; and
- Minimizing employee turnover.
If you are a business owner and you think you have found a business succession option that checks ALL of your boxes, you should probably take a closer look. A perfect solution is rarely available. Instead, you should be looking for the solution that checks the boxes you value the most.
An ESOP is a good option for a business owner whose most important priorities include: 1) LEGACY of the company; and 2) LOYALTY to employees.
We often refer to these as the “Two Ls,” and an ESOP is one of the best succession planning alternatives for serving those priorities.
There are also favorable economic benefits to the seller in an ESOP transaction, especially from a tax planning perspective. However, if your top priorities in the sale of your business are maximizing the sale price and receiving as much liquidity as soon as possible, then you may be better served with selling your business to a third party in an auction process.
There is an old axiom about the dangers of narrow-minded focus: To a hammer, everything looks like a nail. We are careful not to see the world of business owners from the hammer’s perspective.
To the contrary, our mission is to educate the business community about what ESOPs are, and perhaps as importantly, what they are not.
DeWitt Law Firm
(262) 754-2840
dewittllp.com
