What’s your exit strategy?

The majority of the country’s private business owners are nearing retirement age. Because so many entrepreneurs have a large percentage of their net worth tied up in non-marketable business stock, many CEOs are beginning to consider how they will cash in on the value of their businesses and diversify their investments. Selling the business is an option, but there are many more sellers than buyers in today’s market.

For these reasons, owners are starting to look inside their companies for potential purchasers. However, an outright sale to an employee group is wrought with challenges. It can be difficult or impossible for employee management groups to obtain financing. The transaction negotiations can create discord among employees and owners. And in many situations, the sale isn’t tax efficient, especially for regular or C corporations.

Despite the challenges, owners still have a viable option for unlocking part or all of their investment in closely held stock through a sale to employees. Via an Employee Stock Ownership Plan (ESOP), companies can create a qualified retirement plan that acquires and holds the stock of the employer for the benefit of the employees.

Before you discard an ESOP as too cumbersome, complex, or challenging, here are a few facts that might cause you to give ESOPs a closer look:

• Approximately 11,500 ESOPs exist in the United States, about 2,500 of which are 100% employee owned.
• Less than 2% of employee-owned companies were financially distressed when they established their ESOP.
• The transaction costs associated with a traditional business sale are comparable to those associated with an ESOP sale.
• Salary information does not need to be shared with employee owners.
  A long-term study by professors at Rutgers University showed that ESOPs increase sales, employment, and sales per employee by approximately 2.3% over anticipated non-ESOP figures and that ESOP companies stayed in business longer than non-ESOPs.
• The Employee Ownership Foundation’s 2009 Economic Performance Survey found that 88.2% of companies declared creating an ESOP “a good decision that has helped the company.”

On the other hand, no strategy is a panacea. An ESOP may not be right for your company if you have a small and/or weak management team, if one or two clients represent 25% or more of your revenue or profit, or if the fair market value of the shares being acquired is less than $4 million.

At NJE, we count ourselves among the growing number of successful 100% ESOP companies, and we have helped numerous reputable ESOP organizations make a lucrative transition and reap the many rewards of employee ownership. If you are considering an ESOP, our experts are ready to provide you with the proper education and council you need. Why not contact NJE for some Straight Talk today?

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