Successor Management Strategies

“It must be a fragile system if it can be brought down by just a few berries.” Katniss Everdeen, The Hunger Games

There are times when a business owner would like to use an Employee Stock Ownership Plan (ESOP) to transition ownership of their company but it just doesn’t work. Sometimes it is a timing issue and it can be revisited after some changes are made.  Other times it is more complicated than that and it just isn’t a good fit.

It is important that the selling owner have a successor management strategy as part of their exit plan. This is particularly important if they plan to leave the organization upon sale or shortly after.

Many times it is the vision and drive of the business owner that has produced success. The owner is often so busy executing on their business plan that they haven’t had a chance to develop others to run the organization in their absence.  Perhaps they have a unique relationships or knowledge.  Maybe they bring specific skills that are not widely available.  They may have developed technology or processes that they hold very close and are not well understood by others in the firm.

Not only does this jeopardize the future of the company, it can also have a significantly negative impact on the value of the company. As an owner begins his or her preparation for the sale of the company, it is important not to diminish the role of developing a successor management strategy.

But there are certain industries where it is extremely difficult to do that. Firms that are based primarily on selling, where it is the skill of the sales person that adds value, find this particularly difficult.  They may be able to hire replacement staff, but that doesn’t necessarily mean replacement results.  You can see this in financial advisory firms, for example.

You can also see this in creative firms where it is the unique ability of the person that creates value. You may be able to hire other creative people but that may not resonate with the clients in the same way.

At times firms can overcome these challenges but it can involve a long transition period where relationships are developed and reinforced with current clients.

In The Hunger Games President Snow was worried that all of Panem could be brought down by just a few poisonous berries. Don’t let your transition plan be brought down by a lack of identifying and developing the future management team for the company.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs.

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The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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Liquidity and legacy for business owners

“Always remember: Your focus determines your reality.” Qui-Gon-Jinn, Star Wars Episode 1: The Phantom Menace

Employee Stock Ownership Plan (ESOP) owned companies don’t just happen. Most often they are created after a great deal of research and consideration.  Business owners typically look at several options in addition to the ESOP including third party sales, private equity, and management buy outs.  Selling to an ESOP requires a focus on outcomes.

So why have almost 7,000 companies decided to create an ESOP? An ESOP generally allows the business owner to generate liquidity and maintain the company legacy.  Both are important to many selling business owners.

Typically, the primary purpose of the sale of the company is to generate liquidity for the selling owner. The proceeds from the sale can be used to diversify their investment portfolio, fund their retirement, or a variety of other goals.  The key is that regardless of who the company is sold to, liquidity will be generated.

The sale proceeds may vary slightly depending on who the company is sold to. However, selling to an ESOP may actually generate greater net sale proceeds due to its unique tax treatment.  The owner may be able to defer or eliminate capital gains under certain circumstances.  In at least one state, Iowa, selling to an ESOP may allow the selling owner to qualify for a fifty percent reduction in their state capital gains tax.

But for many owners legacy is also important. Will the company remain in the community?   Will the employees keep their jobs?  Will it continue to offer the types of products and services that it does today?

While there are no guarantees (ESOP owned companies can be sold, merged, etc.), they are more likely to remain in the community where the employees are also the beneficial owners. They are also more likely to grow in those same communities.  For owners that are concerned with legacy, an ESOP may be a very good option.

ESOPs don’t just happen. But, they can help a business owner generate liquidity and maintain their company’s legacy.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs.
Follow @twitter   

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Affiliation Disclosures

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Alligators, sharks and bears…oh my!

People offer all kinds of suggestions about what you should do in the event of an encounter with wildlife. Run into a bear? Play dead. Attacked by a shark? Punch it in the nose.

One of my favorites is that if you come across an alligator you should run in a zigzag pattern. Although this is an often repeated myth the reality is that alligators rarely pursue humans as we are too large to be considered prey. Secondly, alligators are actually quite fast for short distances. What you should do is run as fast as you can straight away.

Business owners often run in a zigzag pattern when it comes time to transition ownership of their company. They run between selling to a third party, their management team, family, or their employees. Each of these buyers has advantages (and disadvantages). Evaluating their options can be complicated and expensive. Just a few of the factors to consider include:

  • Third party buyers offer liquidity but the selling owner gives up control. If legacy is important this may not be an attractive option.
  • Selling to the management team often requires that the seller finance the transaction and may not fit in with the desired timeline to sell.
  • A family member sale may not generate the needed liquidity as these transactions often involve gifting strategies.

Selling the company to the employees through an Employee Stock Ownership Plan (ESOP) can overcome many of these concerns. An ESOP can pay up to fair market value for the company stock providing liquidity to the selling owner. An ESOP owned company is more likely to grow in the local community as the beneficial owners are the employees. Many times banks will lend money to the company, eliminating or minimizing the need for the seller to finance the transaction. The owner can sell a minority interest to the ESOP allowing family ownership to continue.

In addition to these benefits, ESOPs are afforded favorable treatment under the tax code. This allows an ESOP to often be a very attractive financial option for the selling owner.

Playing dead with a bear, punching a shark in the nose, or running in a zigzag from an alligator may not be good ideas but looking into an ESOP for your business might be.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter –  @jlripperger.

Click here to follow my ESOP blog

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
“Affiliation Disclosures” While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
 
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Social media – you only get out of it, what you put into it!

I’m fortunate that my job allows me to travel around the country and talk with financial services professionals about how and why they should use social media. One of the questions I field the most is, “how much time will it take?”, but what you really want to know is: “is it worth my time?” 

My response: “you’ll only get out of it, what you put into it.”

 

Social media is about interaction and conversation. It’s about creating and maintaining relationships. If you’re not a part of the conversation, how can you gain any value from it? 

Maximize your time on social media

Social media can help you build your business, but to do so efficiently, you need to take a strategic, targeted approach. Here’s how:

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