Most successful businesses are worth much more than the value of their assets alone. Since banks generally don’t lend money with “goodwill,” it’s hard for a homeowner to get the value they’re looking for in exchange for a lifetime of work because a third-party buyer is often only interested in the value of a property’s tangible assets. company. The result: Most businesses are selling at a reduced price, with more than 9 in 10 owners financing at least part of the transaction, often as low as 50% of the sale price.
What are your options?
Your most favorable buyer may be an Employee Stock Ownership Plan (or ESOP). The ESOP will pay the fair market for your shares and can close in as little as 120 days. You’ll also enjoy powerful tax advantages, allowing you to defer or even avoid sales tax.
The concept of the Employee Stock Ownership Plan was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few shareholders, could share ownership of assets that produce capital.
Echoing Kelso, the ESOP Association, founded in 1978, believes that employee ownership increases productivity by allowing them to share the wealth they create. His belief was corroborated in a major Rutgers University study (2000) of privately held ESOPs, which found that ESOPs perform better than their pre-ESOP performance would have predicted and are also more likely to stay in business. In addition, ESOP companies have other retirement-oriented benefit plans more often than comparable non-ESOP companies.
Cranston Print Works Company, Webster, Mass, is one of the oldest ESOP companies in the US. In business since 1824, it became an ESOP in the 1970s. Quotes from the employee-owners are on their website : “…this is my company and by doing my best and demanding my co-workers to perform to their full potential…I can have a direct impact on our success and prosperity.”
“I own part of this company, which allows me to make it a better place to work.”
“We share in overcoming our challenges, and if we do, we will share in the rewards.”
“I have to work harder because it’s my responsibility as the owner.”
You may be wondering how your employees could afford to own your company. “Employees are not required to contribute personal funds, take out loans or provide personal guarantees,” says Dynasty Capital Advisors vice president Myron Goodrum. “Instead, the purchase is made on a contribution basis, similar to other tax-qualified plans.” In the end, the owner receives a check for the fair market value and the employees become owners of the shares through a solid retirement plan invested in the company’s shares. An ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, “leveraged ESOPs” can be used as a corporate finance technique.
Some M&A firms, such as Atlantic Management Co, Inc., Portsmouth, NH, include ESOP transactions among their services, along with business valuation and ownership transition. Other firms, such as Dynasty Capital Advisors, a Hammond, Louisiana-based firm, focus solely on ESOP transactions and operate nationally.
Richard Duffy, head of chapter development for the ESOP Association and president of Ownership Vision, Inc., a Salem, NH, consulting firm that provides communications and ownership culture services to ESOP companies, explains that, “An ESOP gives you It gives the company the opportunity to create a competitive advantage that can increase profitability from 3 to 13%.” Duffy further states, “ESOPs are a vehicle to broaden the distribution of wealth. We have a very small percentage of people who control wealth and capital in this country. I am a big believer in spreading employee ownership so that people who helped create wealth and capital participation in the benefits of it.
There are more than 11,000 ESOPs in effect today, covering 10 million employees, including the widely publicized deal recently executed by Sam Zell with the Chicago Tribune. Some other well known ESOP companies are: Anderson Windows, Publix Supermarkets and WL Gore Associates (makers of Gore-Tex).
The Tribune deal is the largest ESOP purchase in history – over $13 billion! “This deal marked a new path for acquiring companies using an ESOP,” says Dynasty Capital Advisors president G. Rogers Smith. “Using an ESOP allows someone like Zell to take control of a company and share ownership with employees. It’s a textbook case of what’s possible, never tested before.” Given the track record of ESOP performance, it was a good move for both Zell and the Tribune.
Dynasty Capital (www.dynastycapital.com) is one of the most active ESOP providers in the country. Myron Goodrum is responsible for business development and new client selection. “In ESOP circles we are known as the company that can ‘close the deal.’ In fact, we close more than 96% of the transactions we accept,” he says. (Myron Goodrum can be reached at [email protected].)
(First printed in New Hampshire Business Review. 9/07)