Doing Well While Doing Good: The ESOP Exit
Nearly every day, a business owner makes the personal decision to retire. That’s an easy decision to reach in principle. But the specifics? The concrete plan? Figuring that out can be overwhelming.
Let me suggest 2 things to think about.
1. Cold turkey versus gradual exit.
Do you want to unload the whole thing and walk away in one stroke? Or would it be appealing to exit in stages, taking equity value off the table as you go, reducing your workload as you prefer, while continuing to control the company until you’re ready to fully retire?
2. The impact of a sale on those around you.
A sale of your company will have a profound impact on your employees, your vendors, your professional advisors, your neighbors. Does it have to be a painful experience for them?
Exiting via an ESOP opens up a range of possibilities that simply aren’t available through other exit transactions. One of these is the opportunity to create a staged retirement plan for yourself. In the professional world – think attorneys, CPAs, etc. – the idea of working full tilt for 40 years, then suddenly stopping overnight, has gone the way of the dinosaur.
It has become the norm for professionals of a certain age to begin ramping down their workload, perhaps working on a consulting basis, while remaining active in their profession. These professionals appreciate the opportunity to continue their work while freeing up time for golf, travel, etc. The practice even has a name: phased retirement.
An ESOP exit offers that same kind of ramp-down to business owners. A popular path is to develop a 5-year transition plan. At the outset, the owner sells 49% of his company to the ESOP.
Over the next five years, the owner mentors and grooms successor leadership in the company, preparing them for the eventual challenge of running the company on their own. During this time, the owner will back out of day-to-day involvement in operations at his own preferred pace, perhaps stepping down as CEO in year four.
At the end of the five-year transition period, the owner sells his remaining 51% and moves into full retirement. Of course, there is no special magic to the five-year term. Based on an owner’s preference, it could be three years, or it could be ten.
Doing Well While Doing Good
Consider also what happens to his company if he sells it some other way. His business has been:
- a customer of many other local firms,
- regularly purchasing supplies and services;
- a taxpayer contributing to local government;
- an employer providing jobs to scores of individuals.
So what happens?
Doing Well While Doing Good
Too often, it is sold to a large business – often based out of state – and is soon dismantled, with many of the jobs and much of the economic activity shipped out of the community.
A friend here in San Diego told me of her own experience with this. She was the non-owner CEO of a local company that was sold to a large out of state firm. Not only was she out of a job, but within a year employment at the facility dropped from 180 to under 100.
Those outcomes – the kind that put a real dent in the local community– can be avoided if the owner exits via a sale to an ESOP. An ESOP provides large tax subsidies to support the purchase of company stock on behalf of the company’s employees.
So a business owner can use an ESOP to sell his company at full fair market value to the team that has been working for him. Special tax breaks can actually help the selling owner come out way ahead, while the local community’s economic base is kept intact. Employees keep their jobs, local vendors keep the company as a customer, and the local government maintains its tax base.
The ESOP: it’s an option that every business owner should know about.