This is the fifth in a series of articles that will attempt to dispel ten common misconceptions, or fables, about ESOPs.
ESOP Fable #8: I fear that my employees can sell their stock to someone else.
Another common fear of business owners considering an ESOP is whether employee /shareholders can freely sell their shares to anyone on the street. This concern is addressed by specific restrictions placed on the shares in the employees’ stock accounts. Most ESOP plans give the company a specific right of first refusal on all stock contributed to employees.
What this means is your employees, upon distribution, must offer to sell their shares back to the company. This is the mechanism through which the employees receive their retirement funds; and it keeps shares from falling into the hands of unrelated companies or individuals. Further, all shares are distributed with a back-up liquidity measure called a put option. This put option allows the retiring employee to sell (or put) his or her shares back to the company at fair market value. Both the stock restriction and the put option ensure liquidity for the employee, and trade protection for the company.
ESOP Fable #9: I will not be able to sell a part of my company, while leaving the other part to my children.
Often business owners would like to leave their businesses to their children; but must also fund their own retirement years. A logical solution would be to sell a partial interest in the company, and leave the rest to the children. However, selling a partial interest in a privately held company can be nearly impossible, unless the seller will agree to a steep discount in price.
ESOPs, on the other hand, will allow you to sell an interest in your company to its employees, at fair market value, and gift or sell the remaining interest to your children. Under this scenario, your children can remain in control of the company, while you receive a lump sum distribution for the interest sold to the ESOP.
Next month’s article will tackle: ESOP Fable #10: An ESOP will remedy all of my company’s problems.
As ever, if you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free, confidential, consultation with us, have them contact me directly.
By: Mike Ertel, Transworld M&A Advisors