As more entrepreneurs, like Ms. Cabot, approach retirement—about 30% of the nation's business owners are 55 or older, according to the U.S. Small Business Administration—many are choosing to sell their companies to their employees, rather than outside buyers.
In the alphabet soup of company forms (S-Corp, C-Corp, LLC, LLP, LP, LTD., and so on and so forth) there is a growing turn toward a slightly more obscure acronym: the ESOP.
So, what is an ESOP, what can it do, and is it right for your business?
ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either restructuring the business or selling it outright. With an ESOP you accomplish both goals and build the company around the very employees that compose the company in the first place.
Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a retirement asset while the ownership of the founder is bought out.
Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article gives examples of how an ESOP can work a win-win for all concerned under the right circumstances. These examples include Bob’s Red Mill, for example, or, from a different industry, Manson Construction Co.
ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business succession strategy.
Reference: The Wall Street Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”