How Will You Sell Your Business?
As the baby boom approaches retirement, the ESOP option grows increasingly attractive.
For every seller, there must be a buyer. How will you sell your business? Who’s going to buy your business? The answers for today’s owners may not be what they were in the past.
The best estimates are that there are now 78 million Baby Boomers in America (people born between 1946 and 1964). Much of this demographic bulge is now in its 60s. In fact, about 8,000 Americans turn 60 each day, and that number is growing. This means that a tide of Baby Boomer retirement is rising.
The baby boomers are especially over-represented when it comes to business ownership. After all, who generally owns successful, established businesses? Twenty-somethings? Not so much. According to the US Census Bureau, there are approximately 6 million U.S. businesses with employees. More than half of these businesses are owned by Boomers – who will want to unload those firms as they retire.
The Federal Reserve estimates that in 2008 – the first year that the Baby Boom officially hit age 62 – nearly 500,000 of these businesses were put up for sale. Over the next few years, predicts Kiplinger Business Resource Center, the annual rate of firms put on the market will rise to 750,000. As many as half of the privately held companies in the US, will change hands between 2014 and 2021. Who is going to buy them?
This trend may explain why owners are increasingly looking to employee stock ownership plans (ESOPs) when they want to liquidate the value of their ownership. As it turns out, this particular exit ramp has a lot to offer. One big part of that, relative to the issue just raised is that an ESOP is always a willing buyer. Have your company appraised for its fair market value to set the price, decide on the financing, and an ESOP will always say yes to an owner who offers to sell an ownership stake.
But there is a lot more to like about ESOPs than simply their readiness to buy. ESOPs can do some great stuff – not just for owners, but for their company, their employees, and their home community. Consider:
- For owners. You can sell any portion of your ownership interest to an ESOP. So take some value off the table to gain some permanent economic security, while continuing to run the business – then sell another piece a few years later, if and when you want to. The tax advantages for ESOPs are so substantial that taxes saved can cover virtually the entire purchase price, so you don’t have to be limited by employees’ ability to raise the purchase money.
- For your company. Business school research has shown repeatedly that employees who own a stake in their company work harder and smarter, with more focus on company success; and that translates into higher productivity and faster company growth. See ESOPS and Corporate Performance. Everyone on the team shares in the gains.
- For our capitalist system. When employees have a stake in the success of their company, they begin to share the owner’s concerns about business taxation, excessive regulation, and other problems that can impede economic growth. As written about in Forbes magazine, putting owners and employees on the same page, sharing the same concerns about business conditions, is a win-win arrangement.
- For your local community. What happens when a business in your town is sold to a big, out of state buyer? Usually, the local business will lose its identity; many of the employees will lose their jobs; and local vendors – the firm’s CPA, insurance agent, suppliers, etc. – will lose a valuable client. In short, the sale leaves a crater in the economic base of the community. But when the owner sells to an ESOP, the community is strengthened, with the management team stepping up and employees getting a precious opportunity to own and run a business.
So, as it gets harder to find a conventional buyer for middle market companies, know that there is a less conventional alternative that has a lot going for it.