Is an Employee Stock OWNERSHIP Plan Right for Your Business?

One of the biggest reasons business owners struggle with how to exit from their business is getting a grasp of all of the options available to them. Often times, the business owner’s biggest financial asset is tied up in the value of their business. Obviously, maximizing the sale price upon exiting the business is a goal of most business owners, but there are typically many other concerns:

• How will a sale affect the employees?
• Will the owner still be able to work?
• In cases where there are minority shareholders, how are they dealt with?
• Will the Company name remain intact if sold to a third party?

The answers to these questions can be much clearer if the business considers a sale to an ESOP. But, is your company a legitimate candidate for an ESOP? ESOP experts provide varying answers to this question. Based on our experience, we believe the following are key areas to consider:

1. Number of Employees: Although there can be exceptions to this, we believe a company should have at least 50 employees to launch a successful ESOP.

2. Type of Employees: The employee base should be primarily made up of full-time workers. Companies with consistent employee turnover are not good candidates.

3. Management Team: The company will need to have a strong management team. Although a selling owner can still be involved, and even be running the company, an ESOP transaction will be hard to complete without a strong management team behind the owner.

4. Limited Existing Bank Debt: Typically ESOP transactions are partially funded by bank debt. If the company already has significant bank debt, an ESOP may not be a good option (unless the owner is willing to be the bank!)

5. Consistent Positive Cash Flow: Even with the multiple cash flow advantages of an ESOP, a company wishing to complete an ESOP transaction will need to have a proven record of positive cash flow sufficient to handle the debt requirements of the transaction.

An ESOP could be a great choice for exiting a business. Any business owner that meets these key criteria should contact us for additional information about how ESOPs work.