You've worked hard to build a company, but with retirement or new possibilities on the horizon, it may be time to consider your exit plan. A few options exist for company owners looking to sell, including employee stock ownership plans, or ESOPs.

Unlike selling through the merger and acquisition (M&A) process or to a private equity (PE) or venture capital (VC) buyer, an ESOP provides a unique opportunity to give employees ownership of the business in a way that may align with your values. If you're considering selling and want to explore the options, here's what to know about employee stock ownership plans and how to determine if this structure is the right fit for your business.

Selling Your Business: Exploring the Options

Business owners looking to sell typically go through one of the following sales routes, with pros and cons to each.

1. Selling to a Strategic Buyer Through M&A

Selling to a company through this process involves merging with or being acquired by another company. It may allow for some synergistic growth or opportunities to break into new markets. It can also provide you with immediate capital for new projects or retirement.

2. Selling to a Financial Buyer Through PEs or VCs

PE or VC firms bring industry knowledge and capital to a potential deal, offering to buy all or the majority of your stake in the company. This relationship can immediately provide liquidity, access to a network of professionals and the potential to retain some ownership.

In both of the above options, buyers often emphasize returns and profitability, which could lead to significant operational changes, a new management team, employee restructurings, culture shifts and less community involvement.

3. Creating an Employee Stock Ownership Plan

An ESOP is an employee benefit plan that allows employees to become business owners through the allocation of shares of stock. This plan provides a unique opportunity to align the company's long-term goals, culture and interests while providing liquidity and potential tax advantages for the owner. Many business owners who opt for an ESOP do so because they can continue to manage the company as they eventually transition.

Stanley Zuba, an Eastern Bank customer and founder of Stanley Tree Service, recently went through the selling process. After exploring M&A and PE options, he settled on an employee stock ownership plan. “I found the financial buyers and private equity firms were looking at all that I and our team of employees built strictly from a numbers perspective, and a return on capital,” he says. “They didn't prioritize the people in the business or our interactions with the community as I did. I decided that wasn't the route for me. For me, the ESOP is the best of both worlds. I sit on the board with a representative from the ESOP and can still manage the business, reward employees and stay involved in the overall business operations, while planning and positioning the business for long-term success.”

Considerations for Employee Stock Ownership Plans

Through an ESOP, employees gain ownership of the company through allocations of company stock. It's a retirement plan the company sets up as a trust to hold stock shares on behalf of employees. Shares are often distributed by a predetermined formula, including salary or years of service. Also with an ESOP, the owner has discretion to choose the amount of the company to sell to an ESOP, which can be up to 100%. This allows employees to share in the company’s success and take a more active role in its strategy and long-term goals.

Benefits of Employee Stock Ownership Plans

ESOPs can provide benefits for key stakeholders throughout your company:

Business Benefits
A boost in employee productivity can help align goals and improve performance. These plans also help increase employee retention.

Employee Benefits
These plans don't require out-of-pocket contributions from employees, as with 401(k)s, and with added ownership in the company’s stock, they can help to close the income inequality gap, especially among low- and middle-income earners.

Owner Benefits
Plans can allow business owners to stay involved with the company and continue its legacy while rewarding employees and offering some tax advantages.

Factors for Owners and CFOs to Consider

An ESOP isn't the right fit for every company. As you explore your options, keep a few key factors in mind:

Company Size and Structure
ESOPs are typically more suitable for established, profitable companies with stable cash flows.

Employee Engagement
Assess employee commitment and if they're receptive to employee ownership. Create a communications plan upfront to proactively explain the benefits of an ESOP and understand employee interest in it from the get-go.

Long-Term Goals
Consider your desire to preserve the company's culture, legacy and commitment to employee engagement and well-being.

Financial Considerations
You may need financing to facilitate the conversion to an ESOP. Evaluate the financial, valuation and tax implications of the transaction.

Transition Period
Converting to an ESOP involves a transition period, including appointing a trustee, evaluating the immediate and long-term financial position of the company, and communicating with customers about the company’s stability. For business owners curious about the transition, the ESOP Association has valuable resources, including case studies, local support and events.

Explore Your Next Steps

Incorporating an employee stock ownership plan offers a unique opportunity to show appreciation for your workforce and provide motivation for continued dedication while benefiting from its success. But it's not a decision to take lightly — you'll need to consider if your business, employees and goals align. That's where a banking partner with experience and know-how can work with you to make the transition smooth for you and your company’s employees.

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The Commercial Banking Team at Eastern Bank can help you assess the viability of implementing an ESOP, finance the purchase of company stock and provide lines of credit for ongoing needs. Contact a banker here.

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