Article written by:
Brian Bornino, CPA/ABV, CFA, CBA
Director of Valuation Services
More and more business owners are discovering the unique benefits of employee stock ownership plans (“ESOPs”). As proud advocates of ESOPs, GBQ has written and spoken extensively about how ESOPs can benefit employees, management, the company, and selling shareholders; however, business owners and their advisors often overlook the wide range of reasons why companies choose to implement ESOPs in the first place. To illustrate how ESOPs can help businesses and their owners solve a variety of issues, we highlight five short case studies of recent ESOP formation transactions that we have been involved in.
- Ohio-based IT Consulting Firm: As a dynamic, rapidly growing IT consulting firm, the primary objective of the company’s shareholder and CEO was to win the “war on talent” by attracting and retaining the very best and brightest in a highly competitive marketplace to facilitate the company’s exponential growth in revenue and profitability. Since implementing the ESOP about a year ago, this company has added a couple of key executives, and the ESOP was a key factor in being able to attract this talent.
- Arkansas-Based Engineering Firm: As a 300-person engineering firm with a proud 60+ year history, the primary objective of the company’s 20+ shareholders was to create a sustainable ownership model that would ensure that the company could maintain its legacy as an independent, employee-owned company for the next 60 years. Since implementing the ESOP in 2019, the company is now 100% income tax-free and committed to remaining independent for many years to come.
- Ohio-Based Logistics Company: This Company (had three shareholders, with two being ready to retire and “cash out”. However, the other shareholder, the CEO who was in his early 50s, wanted to remain an owner and grow the business from its then-current level ($40 million) to a $100 million enterprise over the next 5 to 10 years. Therefore, the ESOP formation involved the ESOP buying out the two shareholders (75% of the company) and the CEO retaining his interest. Due, in part, to the ESOP’s tax and business advantages, this company has made six acquisitions over the past 10 years and has surpassed the $100 revenue mark.
- Indiana-Based Contractor: The success of this specialty contractor is a direct result of the hard work and performance of its employees, including its project managers, estimators, field workers, and support staff. The average tenure of this company’s employees is 10+ years, and many have worked with the company for 20+ years. Therefore, when it came time for the sole shareholder and CEO to transfer ownership, his objective was clear: transfer ownership to the employees who helped build the company. After the 100% ESOP transaction, ownership was shared among all employees, and the contractor proudly displays “An Employee-Owned Company” on all of its logos.
- Equipment Leasing Company: The owners of an equipment leasing company were ready to sell their business, but due to the large amount of fixed assets, the potential tax on a third party asset sale put a huge dent in net proceeds. Ultimately, these owners viewed the ESOP as an opportunity for a tax-advantaged sale of stock to employees. Although the ESOP ultimately paid a lower price than the company’s third-party offers, the sellers’ net after-tax proceeds were actually greater due to the tremendous tax advantages (in this case, the sellers elected a tax-free rollover only available to owners selling to an ESOP) of selling to an ESOP.
These case studies illustrate five of the primary reasons why business owners choose to sell their companies to their employees through an ESOP, including to: (1) attract and retain key management; (2) preserve a legacy as an independent company and create a sustainable ownership model; (3) take advantage of the tax and business advantages of an ESOP to grow the company; (4) reward the employees that have helped build the business; and (5) enjoy the tax advantages to the selling shareholders.
GBQ’s ESOP Advisory practice is involved in 100+ ESOP engagements annually. We have worked with hundreds of clients to evaluate and install ESOPs, and, although their reasons for pursuing an ESOP may vary, virtually every one of these clients is thrilled with their ESOP. Please contact GBQ if you would like to learn more about ESOPs and how an ESOP might fit with your company.