For many business owners, a succession plan is about more than creating an exit strategy or profiting from the sale of the company. It’s about preserving a legacy in a way that benefits the company and its employees as well as the business owner(s).
One way to do that is by selling the business to your employees through an employee stock ownership plan, or ESOP. Unlike selling to a competitor or private equity group, establishing an ESOP provides a range of benefits to all involved.
With an ESOP, business owners sell some or all of their shares to a trust that manages the company’s stock. Employees get an ownership stake in the company and a potentially valuable retirement benefit. The sellers receive a fair price for their shares and have the option to remain involved in the business. The business benefits from continuity and stability.
For Mark Gaetz and Jim Burns, former owners of Mulcahy Co., establishing an ESOP was a way to continue to be involved in the operation and growth of their business while rewarding the employees who helped make it a success.
Founded in 1929, Mulcahy Co. represents a variety of manufacturers producing products for the heating, cooling and plumbing industries. Gaetz and Burns bought the company in 2009 and under their leadership it tripled in size.
“When we hit 60 employees, we had a lot of people wanting a piece of the pie,” said Gaetz, Mulcahy Co. CEO. “So you’ve got to concern yourself with how to divide it up every year. Invariably you can’t do it right; there are too many politics involved. So we started going down the ESOP avenue.”
Setting up an ESOP can be complicated. The right team of experts helps make the process easier and ensures a smooth transition of ownership.
Some questions to consider before pursuing an ESOP:
• Does the current business valuation for the sale of the company meet the financial goals of the owner/seller?
• Is the right management in place for a smooth transition and company longevity?
• Will your employees embrace the mind-set of an employee-owner and approach their roles in a way that benefits the company as a whole?
Diversified Plastics spent several years considering options for a succession plan before pursuing an ESOP in earnest. Founded in 1977 by Jim Dow, Diversified Plastics is a full-service plastic injection parts manufacturer providing prototyping, manufacturing and assembly.
Read the rest of Jeff Campbell’s article here at Minneapolis Star Tribune