There are many misconceptions about ESOPs today, sometimes in the business press, and sometimes by professionals from various fields. With all this misinformation and misconceptions about ESOPs, it can be difficult – if not impossible – for the average business owner to make an informed decision about whether setting up an ESOP makes sense for himself, his company, and his employees.
This is the first in a series of articles that will attempt to dispel ten common misconceptions, or fables, about ESOPs.
ESOP Fable #1: It would be easier just to sell my company to a third party.
Business owners often hold the belief that “When the time comes to retire, I will simply sell my company to an interested buyer.”
Unfortunately, it’s not that easy. Finding a qualified buyer who is ready, willing and able to pay a fair price for a privately held business can be a daunting task even in good economic times, and next to impossible in bad economic times. In the worst of times, even an otherwise qualified buyer may require the seller to carry back a substantial portion of the purchase price as a seller’s note. The entire business brokerage industry devotes most of its energies to simply finding qualified buyers for willing sellers. Finding such a buyer generally involves advertising the business for sale, interviewing potential buyers, weeding out the unqualified prospects, and negotiating a selling price and other terms.
Even if you have been approached in the past by parties expressing interests in buying your company, getting an actual commitment to purchase can often be disappointing. Many of these “interested parties” cannot afford to acquire your business at a fair price, and/or are hoping to acquire your business at a substantial discount from its fair market value.
Herein lies one of the key benefits of selling your company to an Employee Stock Ownership Plan. There is no need to find a qualified buyer, or to otherwise put your company on the market. Setting up an ESOP actually creates a buyer for your stock. Furthermore, the ESOP will pay fair market value for your stock, in cash. And consummating the sale can take considerably less time than a typical third-party sale, often in less than 120 days. Moreover, an ESOP is typically ready, willing and able to acquire more of your stock if and when you’re ready to sell more of your stock.
Next month’s article with tackle: ESOP Fable #2: ESOPs are only applicable to very large corporations
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