As more entrepreneurs like 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.
Sometimes the family business simply can’t stay in the family any longer. On the other hand, maybe you are not enamored with handing it over to an outsider either. If this sounds like your horns of dilemma, have you considered making your transfer in-house?
When all is said and done, the only ones who know and care enough about the company may just be your employees. Sound intriguing? If yes, then you need to explore a win-win means through which your employees can become owners.
Have you ever heard of an Employee Stock-Ownership Plan, or ESOP?
ESOPs have been growing in popularity, especially when the market was down and outside buyers were scarce. That said, their popularity has not waned, although ESOPS can be a strange and complicated breed.
Essentially, an ESOP mixes a family exit strategy with a company retirement plan. There is a great deal to it with many layers of protection regarding the operations and management of the business.
Of course, there are some that are wary of the ESOP model. MarketWatch recently featured the ESOP and some criticisms of the approach in an article titled “When founder cash out, do workers lose?” Some of the criticisms are broad generalizations, especially as to the topic of valuation. Other criticisms are well taken.
As the article points out, this does affect the employees by opening them up to some of the risks of actual ownership. Is this a good thing? It can mean a whole new kind of motivation and source of innovation, as many have experienced, but it can also become a tricky game of all-your-eggs-in-one-basket for employees-turned-owners. There is a reason some people have the mettle to be owners and others are content to be employees.
From success stories to criticisms there are many voices talking about the ESOP. The original article is worth reading for due diligence purposes if you are on the employee side of the table. Regardless, an ESOP can be a very special tool for all parties at the table and one worth understanding and, just maybe, putting into force.
Reference: MarketWatch (May 17, 2013) “When founder cash out, do workers lose?”