Business Succession Options: Is an ESOP Right for You?

When you’re considering selling or transitioning ownership of your business, it’s important to assess your priorities, your ideal exit plan, and your business’s current financial state to determine which option is best.

Common options include transitioning to a family member, selling to a third party or transitioning to an Employee Stock Ownership Plan (ESOP). To help you determine which business succession option is the best fit for your company, we’ve outlined the advantages and disadvantages of each.

Option #1: Transition your business to a family member

For many business owners, passing on ownership to a family member or selling to their top managers is an obvious option. It relieves the owner from their responsibilities while keeping the company in the family or with current leadership. However, throughout succession planning, some will find they lack family members who are interested, prepared or equipped to handle taking on the business. Similarly, their chosen successor(s) within the company may not have the capital needed to acquire the business.

Option #2: Sell your business to a third party or private equity group

Once a business owner realizes transitioning ownership to family or selling to top leadership are not feasible options, they often consider selling to a private equity group.

Selling to a private equity group has advantages, including:

• Potentially permits the business owner to completely exit the company, allowing them to retire with no ownership responsibilities.
• The business owner can receive cash for the sale upfront.
• Some private equity groups are willing to pay above market value for businesses if it’s a good opportunity and fit.

However, a few things to keep in mind when considering selling to a private equity group include:

• Losing ownership responsibilities means loss of control over the future of the company, including its location, employee retention and more. This means the sale could have a negative impact on the local community in which the business operates.
• The sale may require a large upfront tax payment. Consult your tax advisor for guidance on handling this factor.

Option #3: Transition your business to an ESOP

While an ESOP may not be an obvious first thought for business owners engaging in succession planning, many find it meets their needs.

ESOPs come with many advantages, including:

• Beneficial tax options for the seller, such as deferred or reduced capital gains taxes and income taxes.
• Minimized turmoil for the company and its employees. Selling to an ESOP allows the company to retain its employees, resulting in a smoother transition for employees and the business as a whole.
• More control over the business owner’s legacy. Especially for businesses in small communities, selling to an ESOP is a strategy founders may use to ensure employees are taken care of and their legacy remains intact even after they leave the company.

However, ESOPs may not be right for every business. One of the first steps of the ESOP transition is to conduct a feasibility study. This analysis will help you decide whether an ESOP is right for your business and how the ESOP transaction should be structured. Check back for future articles that will dive deeper into ESOP feasibility analysis.

Interested in an ESOP? Here’s what you’ll need

You’ll need a strong team in place to support your plan to transition your company to an ESOP. That team must include a good banker, an attorney and an accountant, all who understand the ins and outs of ESOPs and Employment Retirement Income Security Act (ERISA) law. You’ll also want a sell-side advisor to manage the process of negotiating, selling and transitioning.

Reach out to me to learn more and determine if an ESOP is right for your business.

Bankers Trust and its affiliates and their representatives do not provide tax or legal advice. You should consult with your tax and legal advisors regarding your unique situation and needs.