“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.
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.