Employee Stock Ownership Plans (ESOPs) are more than just a fad. The benefits of having a plan by which a company’s capital stock is bought by its employees or workers are very real and tangible. In fact, NuVescor is currently helping two well-established ESOP’s grow through acquisition. We are also selling one of our manufacturing clients to a well-established ESOP.
Despite the benefits of ESOPs, there are some pitfalls. While setting up an ESOP from scratch can be an attractive option, getting an ESOP off the ground does not happen overnight – and creating one within your company can occupy lots of time and resources. For companies looking to enjoy those same benefits without the high startup costs and risk, selling to an ESOP can be a better alternative.
The problem with starting an ESOP from scratch
- High up-front costs – Setting up an ESOP can cost hundreds of thousands of dollars. It is also typically recommended the company has at least 50 employees and an established management team to run the business without the owner.
- Owner financial risk – On top of the regular up-front costs, owners often have to provide financing or personal guarantee bank financing to fund the purchase of the business. For owners who are looking for a comfortable succession plan, this brings added risk to their efforts to step away from the business.
- Major time investment – Most ESOPs don’t begin to run smoothly until several years after they have started. There’s also a major risk that getting an ESOP off the ground can become a major distraction and cause tension within the company – all while taking the focus away from core business activities.
The benefits of selling to an ESOP
- Avoiding the early pitfalls – Selling to a successful ESOP has a lower barrier of entry as there is safety in the size and resources of an established ESOP when it comes to managing companies and their assets.
- Step away sooner and more comfortably– If your business’s main reason for entertaining the idea of an ESOP is to set up a succession plan, selling to an ESOP provides a quicker and safer solution. If you’re selling to an established ESOP, your company will be able to start transitioning right away with a proven model rather than having to develop and troubleshoot its own. For owners who are looking to retire or move on from their businesses, this provides a quicker solution while providing confidence that the company is in good hands.
- Tax savings advantages– Sellers can save on taxes when selling to an ESOP, but that’s not the only advantage. Many ESOP’s do not pay federal tax. Therefore, an ESOP-owned company is more willing to buy stock in a C Corp because they don’t need the ability to depreciate the assets from an asset sale. If done correctly, the seller can take the proceeds from selling their stock and put them into other investments deferring any tax until they sell those investments. This allows them to have some control over when they pay federal taxes and how much money they want to pay so their CPA can help them put together a tax minimization strategy.
- Benefits to employees – Employees of the selling business become owners. Because of this, ESOP’s typically have better benefits and compensation for their employees than non-employee-owned companies. Most of our business owner clients would prefer to sell to their employees but this usually isn’t an option due to financing and the risks outlined above. Selling to an ESOP gives businesses the best of both worlds – employee ownership without the financial risks.
What we’ve seen at NuVescor
In our years of experience in manufacturing industry mergers and acquisitions, clients ask us to focus on ESOP buyers to provide their employees with the opportunity to be owners without having to find a way to finance the transition. The option to sell to ESOPs rather than start them from scratch also ensures sellers that the management is strong enough to operate the business without them. Meanwhile, the sellers, buyers, and employees involved in the ESOP enjoy the advantages that come with the major tax-saving opportunities.
For over a decade, NuVescor has been a leader in the Manufacturing Mergers & Acquisitions industry in Michigan. With years of experience and a proven process, our team delivers excellent results, whether you want to buy or sell a business.
If you’re looking to sell to an ESOP or if your ESOP is looking to grow through mergers and acquisitions, NuVescor can help. Click here to get in contact with us.