As reported by David Wagner, Oct 31, 2019 in the article California Business Owners Spread The Wealth By Selling Their Companies To Their Workers.

Often business owners are working so hard on and in their businesses that they do not stop to consider exit strategies.  In the 2016 ASE Data 31.5% of Indiana businesses have no exit strategy for any business owner.

In the above article 20/20’s VP Mike Mahony shared that their path to employee ownership started a few years ago, when Mahony and his business partner realized they didn’t have anyone lined up to take over the company.

“We’re getting old,” said Mahony. “And I just said, ‘Hey, what’s your plan’?”

Without a successor in mind, they put the company up for sale. But Mahony said they got low-ball offers, including one from a private equity firm.

“They were going to take our company that had no debt and leverage the crap out of it,” he said. The deal would “require us to hit record profits just to get the money. So that was a non-starter.”

Mahony also worried that outside buyers wouldn’t do anything to reward the workers who helped the company succeed. A private equity buyout could even lead to layoffs.

“Then the ESOP option came up,” he recalled.

An Employee Stock Ownership Plan is one way for business owners to sell their company to their workers, often without the workers having to pay anything out of pocket. The purchase is typically made through a trust, using the company’s annual profits.

An ESOP is a great succession planning tool as this:

• Provides the selling owner with a fair market value of the business
• Allows the selling owner to remain involved with the business (if they desire to do so)
• Provides the ability to reward employees who have helped the company grow to its current point and to continue to grow and be successful
• Allows eligible employees to grow wealth by receiving annual allocations of shares that are paid for by the company’s profits.  ESOPs are broad based ownership and thus can help minimize wealth inequality by providing capital income to those who might never have received it previously.

20/20’s field superintendent Pete Hernandez shared that his view of the ESOP benefit is that by owning a piece of 20/20 [it] will make workers more likely to stay and double their efforts to grow the company.  “To know that there’s something at the end of the rainbow coming your way, because you put all this work in, it makes your job much more important,” Hernandez said.