First things first, I know what ESOP stands for, but don’t ask me about Chapter 8 or 409 (h) details. The point of my message here is to simply put some myths to bed surrounding ESOPS. At the same time, I’d like to shamelessly plug the free webinar we are doing this Wednesday with Kreg Tool (an Iowa ESOP company) and BCC Advisers (and Iowa ESOP consulting firm) We’ll be discussing Kreg’s journey through succession planning and how an ESOP became the right fit for them. Greg Weber of BCC Advisors will also be on hand to talk through the process and benefits of how an ESOP might work for your firm.
Myth #1 //ESOPs are expensive
Yes, they are. They do cost quite a bit to set up and administer annually. BUT the tax benefits can be substantial and offset those costs. There are no broker fees and sales are not contingent. So for many company sellers, an ESOP can actually be a cheaper way to liquidate.
Myth #2 //ESOPs don’t work for small firms
They absolutely don’t work well for a firm with less than 20 employees. But as soon as you cross that threshold, an ESOP can be a viable option. You don’t have to have 150+ employees or $10MM in revenue to pull it off.
Myth #3 //I can get more money in a third-party buyout
The ESOP will pay what an outside appraiser deems that a financial buyer would pay (an outside investor or private equity group). So it won’t pay as much as a strategic buyer – like a competitor or large customer - might offer. That said, an ESOP pays cash. There are no owner’s notes, earn outs, or other waiting games. In addition, ESOP’s offer capital gains tax deferral opportunities. With all those extras on the ESOP buffet line, it’s much less likely that a 3 rd party buyout would put more money in your pocket.
Myth #4 //My employees can’t afford to buy me out
No they can’t. But they don’t have to. The ESOP is funded by the firm’s pretax contributions to the Employee Stock Ownership Trust. The Trust can make cash contributions or borrow money to buy shares. The employees don’t come up with that money themselves.