ESOPs or Employee Stock Ownership Plans should be considered as a succession tool by business owners.
When business owners first start to consider the possibility of retiring or transitioning away from day to day operations, many look around them to see who might be a potential buyer. A family member or a friendly competitor or an allied business frequently often come to mind. But perhaps owners should consider their employees as potential buyers.
An ESOP is an Employee Stock Ownership Plan. In the right circumstances, ESOPs can be a great succession planning tool. ESOP’s receive extremely favorable tax treatment. But they are not suitable for every situation and can be somewhat complex and costly.
They often work well if an owner wants to stay involved but obtain asset diversity by selling perhaps 1/3 of the business. There are strong tax advantages. When set up properly both the loan principal and interest is deductible for tax purposes. Note, usually only loan interest is deductible for tax purposes. This is a huge advantage.
An ESOP may be set up with existing cash from the plan sponsor’s balance sheet but are usually leveraged.
- The loan may be from a bank or other financial institution or the selling shareholder may finance the transaction by taking back a note for part or all of the purchase price
- The plan sponsor usually uses its balance sheet to secure the debt financing
- Often the owner must guarantee to loan to the business. Sometimes this guarantee can be limited in time and amount.
The ESOP borrows the money to purchase company stock (outstanding shares, new shares, or treasury shares) which is held in trust for the benefit of the employees.
- The company makes tax-deductible contributions to the ESOP to enable the ESOP to repay the loan
- As the loan is repaid, shares held by the ESOP are released and allocated to employee accounts
- The employee shares are held in trust.
More information about ESOP options can be found at National Center for Employee Ownership or connect with Harvest Business Advisors to discuss your options – email email@example.com or call 877-838-4966.
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at firstname.lastname@example.org or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.
Before you engage a business broker to sell your business you must answer the question:
How can you become profitable – real profitable?
In 95% of the cases business profitability is the key to business value. Before you hire a business broker, investment banker or intermediary to sell your business you first must create value.
Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.
When most people think of profits they think of growth. I love growth but growth often costs money in the short term. If you have 5 years until you sell or if you can grow and maintain your profit margin then by all means grow.
For most companies increasing profitability means CUTTING EXPENSES. You probably can do with less. You probably can be more efficient. Get over it. Decide you can then open your mind to new and different ways to do it. Can schedules be adjusted, can materials be purchased differently, can more work or less work be subbed out, and can you make a full time employee in the office part time?
One key is efficiency. Namely the fact that overhead tends to stay constant so throwing more work at the administrative functions tends to lower those costs per unit. The other way to get there and often the more realistic way is to remove some people, remove some office space, remove some office perks etc. Lower your costs. Get people busy, too busy to complain about being busy.
One way to measure efficiency is to BENCHMARK your financial information against your competitors. This requires maintaining financial information in an industry standard format. Many industries have this (check with your larger trade associations) some do not. Benchmark data is available from many trade associations and several services. Every business runs differently so you may have very good reasons for varying from the benchmark data. Just make sure overall your costs are lower than those in at least the 75 percentile. That is companies performing in the top 25%. Shoot for the top 10% and get there. Average is no good. The average company does not sell unless you have more than $35 million or so in revenues.
Another area to monitor is capital investment. You must keep your equipment running and in good repair. But you should not make major capital investments (for instance build a new warehouse) that will lower your short term profits even though they might benefit you downstream. No one will give you credit for the future potential. Potential is just a dirty word. (Do you pay employees for their potential or for what they did today?)
There are thousands of books on business management, construction management, cost controls, etc. There are legions of consultants who will show you how to reduce costs. If you are stuck, I suggest you look to them for advice on how to achieve this goal. But, as Nike says,” Just Do It”.
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at email@example.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.