We’re both planning to attend the annual conference of the National Center for Employee Ownership in Pittsburgh next week. The prospect got us thinking about employee stock ownership plans, or ESOPs, which are even now one of the most misunderstood and underutilized devices in an entrepreneur’s toolkit.
Let’s review the bidding. At some point you will want to retire from the company you founded. If you don’t have a son or daughter ready to take over, you will probably want to sell the business. (We hope it will be ready for sale; if you don’t know what we’re talking about, see this article.)
And who will be the buyer? Maybe your management team can scrape together the necessary capital—or maybe not. Maybe a strategic buyer or private equity firm will come along with an offer.
Corporate or PE acquirers are likely to give you a good price. But you’ll undoubtedly be facing a big tax bill, and you won’t have any say about what they do with the company once the transaction is complete. There’s a good chance they’ll consolidate it with other operations, strip your name from the door, and hand out pink slips to your loyal employees.
Alternatively, there’s the ESOP, an arrangement that lets you sell your company to its employees, stay on as long as you want, and leave both your managers and your workers in place. You’ll get favorable tax treatment on the proceeds of the sale—often enough to compensate for a lower price than you might get elsewhere. You’ll also know that the company will continue on as an independent business.
Some business advisors will tell you to stay away from ESOPs. You’ll hear that they’re too complex and too expensive. That’s often true for very small companies, but for a business of any size, it’s nonsense. Every sale of a company, when done right, is complex and expensive. There’s no way to avoid the lawyers, the lenders, and the accountants. And there are plenty of said professionals who are highly knowledgeable about ESOPs.
You may also hear that ESOPs don’t work. Tell that to the 7,000 or so US companies that are already wholly or partially owned by their employees through an ESOP. Nearly all are doing just fine, thank you.
Then there’s the occasional advisor who reveals his or her ignorance and prejudice with a dismissive, “What, you want the inmates running the asylum?” Virtually all ESOP companies, of course, run exactly like conventionally owned businesses, complete with a board and a CEO. And no, they don’t think of their employees as inmates.
The real payoff of sale to an ESOP may be the opportunities it opens for companies to thrive and grow. And why shouldn’t they? Thanks to favorable legislation, many ESOP companies pay little or nothing in corporate income tax, so they have more cash available for investment. The employees are likely to be more engaged in their work, more knowledgeable about the business, and more committed to helping the company succeed. After all, it’s theirs.
That’s why you see companies like Massachusetts-based Web Industries, which has been owned by its employees for many years. Web used to be a small company in a low-margin industry, processing rolls of flexible material for industrial companies. Today it is a technologically sophisticated contract manufacturer that partners with world-class customers in healthcare, aerospace, and consumer health-and-hygiene. It has nine plants, and its global headcount is approaching 800.