Hey look kids, there’s Big Ben, and there’s Parliament.
-Clark Griswold, National Lampoon’s European Vacation
Round and round and round the Griswold family went in this 1985 comedy film. Regardless of how many times they traveled the same roundabout, the view never changed. Undoubtedly, many business owners feel the same way as they look at business succession; looking at the same options time and time again – not necessarily finding a solution that fits well for them.
The number of options for transitioning (or selling) your business isn’t limitless. In general, the business owner can sell to a third party, a select group of employees, a family member or the employees. Unfortunately, selling to employees is often the last option considered, if at all.
The majority of companies are sold to third parties. Third parties include competitors, suppliers, distributors and private equity just to name a few. Third party sales can be a double-edged sword – it’s where the owner is likely to get the highest or the lowest price. If the purchaser is a synergistic buyer, they may be willing to pay a premium. However, a third party is also the buyer most likely to make a “low ball” offer, particularly if the seller needs to liquidate in short order.
Selling to a select group of employees (typically management) may be a good strategy if they have access to, or can raise, capital. They understand the business and have experience in operating it. However, access to capital often proves elusive – making this approach impractical for many.
Only one in seven businesses will successfully transition to a second-generation family member1. There is a multitude of reasons for relatively low transfer rate, including different interests on the part of children and the need to generate cash from the business to successfully transition to retirement. Often times, it’s more appropriate to position it as gifting the business to a second generation rather than selling it. In addition, if there are multiple children involved, not all of them may have an interest in the business even if others wish to carry on.
Selling to an Employee Stock Ownership Plan (ESOP) has many advantages for the business owner looking for a succession solution.
- Creation of a buyer for the company that can pay up to fair market value
- Potential preferential tax status for the selling owner and the company
- Business continuity for customers, employees and suppliers
- Flexibility to design a strategy to fit the specific needs of the owner and the company
Rather than go round, and round and round with the same options why not take a look at an ESOP as you examine your succession options?
1 White Horse Advisors Survey, July, 2008.
In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter – @jlripperger.
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